Bank FDs are highly Tax Inefficient

The popular investment options for tax saving are equity-linked savings schemes (ELSS) from mutual fund houses, public provident fund, life insurance policies, pension plans, Rajiv Gandhi Equity Savings Scheme (RGESS) and select fixed deposits with banks.

A survey revealed that nearly 56% of total household savings are parked in tax saving fixed deposit schemes where the money has to be parked for at least five years. However, FDs are highly tax inefficient products since the entire interest earned is taxed as income at the rate applicable to the investor every year.

One of the prospective clients I met was invested in a 10-year cumulative fixed deposit from April 2013. On maturity in April 2023, he is eligible to get the principal and cumulative interest earned, but he was paying tax on the interest component every year.

Logically, since FD rates match the rate of inflation in the economy, these instruments at best preserve investors' purchasing power but do not help in creating wealth in the long run. On a post-tax basis, investors end up with negative real returns. These instruments, however, offer guaranteed re turns to investors. 

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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