A colleague has advised Rohan Vinayak to invest in ELSS funds to save tax. His bank manager says an insurance policy is a better idea. Vinayak's father wants him to go for the time-tested PPF. The Bengaluru-based software professional is confused, but he can't afford to lose time. "I have to show proof of my tax-saving investments by the end of this week or my company will deduct a very high tax," he says.

ET Wealth's annual ranking of tax-saving instruments can resolve Vinayak's dilemma. We have assessed 10 tax-saving instruments on eight key parameters—returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income. Each parameter is given equal weightage and the composite scores of the various options determine their rank.

Our cover story tells Vinayak why he should junk his banker's advice. Insurance policies are definitely the worst way to save tax. They have consistently ranked lowest since the ET Wealth ranking was started four years ago. However, though insurance plans give very low returns of 4-5%, they also inculcate a saving discipline that is so essential for building long-term wealth. Policyholders diligently pay the premium for 20-25 years to keep their policies in force and reap a huge corpus on maturity. It's no surprise then that insurance policies have helped people build property, pay for their children's education and marriage and live comfortably in retirement.

In contrast, ELSS funds have given terrific returns in recent years, but very few investors stay put for the long term. Amfi data shows that almost 35% of investments in equity funds by small investors are redeemed within a year. Another 17% are redeemed within two years, and only 48% are held for more than two years. So, while ELSS funds can give very good returns, they will not make wealth for you if you plan to exit after the three-year lock-in.