Do not go chasing ads, listen to the your needs (Part-1)

Often we come across well drafted advertisements and commercials at the most innocuous of all places. Many of us end up falling prey to some smart ad-men’s near perfect product or advertisement placement.I came across one such advertisement as well. The Ad read ” Save Tax of Rs 42,990 on investments of Rs 1 lacs** “.  The Mutual fund advertisement further explained the benefits of investing in that fund which read as below:

Tax savings: Tax benefits up to Rs 33,990/-* on investment of Rs 1 lac u/s 80c of the Income tax Act, 1961.

Free Life Insurance Cover: 5 times your investment, subject to a minimum cover of Rs 10,000 and a maximum of Rs 5,00,000. Premium on Rs 1 lac cover for 3 yrs would be approximately Rs 9,000 which investors might save.

Capital Growth: ELSS as a medium to long term investment vehicle provides scope for capital growth.

Potential savings on Rs 1 lac investment in ELSS scheme is Rs 42,990.

**Tax saving of Rs 33,990 + Rs 9,000 Life Insurance Premium

*Assuming the investor falls into highest tax bracket and surcharge is applicable.

The advertisement is right in its claims and makes no false promises, mis-selling or overt statements.

Investors would definitely benefit from investments made in such ELSS Tax Saving schemes, however, an investor needs to understand that one of the major highlights of this scheme which is displayed in bold letters above is the charm of saving Rs 42,990.

Do all investors end up saving Rs 42,990?

Simple answer is NO.

Not all investors fall in the highest tax bracket, so savings, for investors in different tax brackets would differ. So it becomes imperative for investors not to chase smart ads and inquire about tax or savings benefits to which accrue to him.

Investors who invest in ELSS schemes are traditionally retail investors who park their money in such scheme as they offer reasonable returns with the shortest possible lock-in period.The government has made a host of individual savings ‘tax-deductible’ under one umbrella called Section 80C and a simple new rule has emerged – if you invest up to Rs. 1 lac in a tax saving instrument or even a combination of them, you effectively reduce your taxable income by up to Rs. 1 lac to save up to Rs. 33,990 in taxes (including applicable surcharge and education cess).

But, you don’t have to invest an entire lac. For example, if your taxable income is Rs. 1,70,000, you would need to invest just Rs. 20,000 in a tax saver to reduce your taxable income to Rs. 1,50,000 and drop your tax to zero!

Below is an indicative table provided for better understanding of tax brackets and applicable effective saving on ELSS schemes for individuals within respective income slabs.

Your annual taxable income (Rs) Your applicable tax before investment (Rs) Optimal amount to invest (Rs) Your ‘new’ taxable income (Rs) Your applicable tax after investment (Rs) Your savings (Rs)
1,70,000 2,000 20,000 1,50,000 0 2,000
1,90,000 4,000 40,000 1,50,000 0 4,000
2,50,000 10,000 1,00,000 1,50,000 0 10,000
3,00,000 15,000 1,00,000 2,00,000 5,000 10,000
4,00,000 35,000 1,00,000 3,00,000 15,000 20,000
5,00,000 55,000 1,00,000 4,00,000 35,000 20,000
7,00,000 1,15,000 1,00,000 6,00,000 85,000 30,000
9,00,000 1,75,000 1,00,000 8,00,000 1,45,000 30,000

5 thoughts on “Do not go chasing ads, listen to the your needs (Part-1)

  1. dear sir,
    thanks very much for this service.but sir who will bell the cat?as long as the so called IRDA is sleeping,all life insurance companies and their agents simply loot very very innocent public in day light.


  2. For a more informed investor who has the time to research, I would recommend selecting mutual fund schemes to invest in based on the following criteria.

    1. Longterm Performance , consistency in Returns
    2. Short Term Performance (though a fund has performed well in the past, is there a let down in short to mid term performance)
    3. Performance across market cycles, like during bullish and bearish phases (how well did the fund perform during the bearish phases)
    4. Fund Corpus (When selecting midcap funds, the corpus size is very important)
    5. Fund Managers performance with the scheme(If a fund just got a new fund manager, I would observe the performance under this new manager before I select the fund)
    6. For equity mutual funds, one will also need to evaluate risk. (Exposure to midcaps, Standard Deviation of the fund)
    7. For debt mutual funds, apart from risk one also need to examine entry/exit loads and expense ratio are very important.


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