Tax saving investments explained

Look at the options available

Following are exempt from tax
The payment towards the principal amount (not interest payment) is eligible for a deduction under Section 80C.
Payments towards the education fees for your children.
If above expenses sum upto 1,00,000, there is no point in invest to save tax.
Once you are done with these expenses, look at the Employee Provident Fund (if you are a salaried individual). 12% percentage of your salary is deducted by your employer towards the EPF. Check your salary slips to find out the amount.
Once you calculate this, see if you still need to invest to touch the Rs 1,00,000 limit under Section 80C.
If you have already taken a life insurance policy or a pension plan, add to the above the premium you have paid this year.
If the above totals to Rs 1,00,000, you do not need to do any more tax investing. But if you have a PPF account, deposit at least Rs 500 in it to keep it going.

Look at the lock-in period
All tax saving investments have a minimum lock-in period. They are not like shares or mutual funds which you can buy/sell anytime.
The National Savings Certificate has a lock-in period of six years. The Public Provident Fund has a lock-in of 15 years.
Even Equity Linked Saving Schemes have a lock-in period. These are mutual funds with a tax benefit. Unlike other mutual funds which you can sell whenever you want, you have to keep your investments in these tax saving funds for at least three years.
And, of course, in insurance and pension plans, the money is only available many years down the road.

Is it right for you
Just because an instrument is available for tax saving, it does not mean you should invest in it.
Always look at it in relation to the rest of your other investments. Don't view your tax saving investments in isolation.
For instance, if you have already invested a fair portion of your money in equity (shares and mutual funds that invest in shares), avoid an ELSS. Opting for an ELSS means a huge portion of your investments will be in equity and that may not be what you want.
Or, on the other hand, if you have invested huge portions in debt funds (funds that invest in fixed return instruments), post office saving schemes, bank fixed deposits and NSC and PPF, you could look at putting some amount in ELSS.

It may be a total rip-off
Let's say you are working on a contract or as a consultant and do not have an EPF. Neither do you have and children to claim education fees nor are you servicing a home loan. This means you have to invest the entire Rs 1,00,000 to get the tax break.
In such a situation, you may get conned by an insurance agent into buying a policy that does not suit you at all.
You may take a policy that will require you to pay a premium every single year for the next 30 years. Is that what you want? Even if it is, be careful. To reach your Rs 1,00,000 target, you may opt for a policy that requires you to pay a hefty premium. You will have to pay this year after year, even when your other monetary commitments begin to increase.
It may turn out to be the worst investment decision you ever make.
If you do not have the time to sit and think about your goals, how much it is you really need to invest in insurance or a pension scheme and how this fits your overall financial situation now and later, avoid investing insurance right now.
Instead, stick to PPF and NSC.