Contributions to PPF ( Public Provident Fund) and ELSS ( Equity Linked Savings Scheme of Mutual funds) are eligible for tax deductions.
PPF gives a return of 8% p.a. The most attractive part being the interest is tax free*. 15 years is the minimum term that you need to hold this account for. It definitely helps in compounding your money in such a period of time.
ELSS also generates tax free dividend (if you opt for dividend payout ) and the capital gains you make out of this scheme is also tax free*.
These two schemes definitely stand out of the rest in terms of tax saving schemes. Fixed Deposits, NSC ( National Savings Certificate ) do not enjoy tax free* returns. ULIPs also enjoy some tax benefits but we have emphasised the need to separate insurance from investment enough on this blog.
So, When we compare PPF and ELSS , Equity is capable of generating greater returns in the long run( esp ..like PPF period of 15 years). So, if one is ready to lock in his money for 15 years or so, he can prefer equity based investments . ( ELSS have yielded 40% return in last 5 years # Same performance however cannot be expected year on year, but around 12% returns can make a huge difference!!! in a 15 year period).
* tax free as per income tax laws applicable in Sep'07