Now Indian tax payers have multiple tax saving options available in the market but the most critical part is making the right choice. The very first question come into mind is, which scheme will help save tax while maximizing returns. Although, traditional tax saving instruments like Public Provident Fund (PPF) and National Saving Certificate (NSC) been hot favorite since long, but now Indian economic growth has opened up a large number of other avenues.
Under section 80C of the income tax act, an individual can invest up to Rs 1 lakh into a tax saving schemes to save tax. The amount invested in these schemes is deducted from your taxable income, bring down your tax liability. If you earn Rs 5 lakhs per annum and make investments of Rs 1 lakh in 80c instruments then the taxable amount will be Rs 4 lakhs. Lets have a look on ELSS over traditional Investment options like NSC and PPF.
ELSS
Equity Linked Saving Scheme (ELSS), as the name suggest it is a saving scheme which invest in the equity market. ELSS is a special category of mutual funds that invest mostly in stocks. They are very comparable to diversified equity funds ( Investment fund that contains a wide variety of securities to minimize the amount of risk in the fund.). The only difference between regular diversified equity funds and ELSS mutual funds (MF) is that there is a lock-in period of 3 years. It means that once you invest in ELSS MF, you can not withdraw your investment for a period of 3 years.
Difference Between ELSS And NSC
National Savings Certificates (NSC), is a post office savings plan supported by the government and is one of the secure investment alternatives.
| Point Of Difference | ELSS | NSC |
| Tenure (Lock-In Period) | 3 Years | 6 Years |
| Minimum Investment | Rs 500 | Rs 100 |
| Maximum Investment | Rs 100,000 | Rs 100,000 |
| Risk Level | High | Low |
| Nature Of Return | According To Market | Fixed |
| Interest Frequency | No Assured Dividend / returns | Compounded half yearly |
| Tax Liability | Tax-Free | Taxable |
| Rate Of Return | Variable | Fixed |
Difference Between ELSS And PPF
Public Provident Fund (PPF), is supported by the government and is generally safe with comparatively high returns.
| Point Of Difference | ELSS | PPF |
| Tenure (Lock-In Period) | 3 Years | 15 Years |
| Minimum Investment | Rs 500 | Rs 500 |
| Maximum Investment | Rs 100,000 | Rs 100,000 |
| Risk Level | High | Low |
| Nature Of Return | According To Market | Fixed |
| Interest Frequency | No Assured Dividend / returns | Compounded annually |
| Tax Liability | Tax-Free | Tax-Free |
| Rate Of Return | Variable | Fixed |
Advantages Of ELSS Over NSC And PPF
- ELSS have a lock in period of 3 years whereas maturity period of NSC is 6 years and PPF is 15 years.
- Potential to give higher returns as compared to NSC and PPF
- Investor can opt for dividend option and get some gains during the lock-in period
- Investor can opt for Systematic Investment Plan (SIP) to make investment in small monthly installments
- Some ELSS schemes also offer personal accident death cover insurance
- Provides 30 to 40% returns compared to 8.4% in NSC and 8.6% in PPF
Disadvantages of ELSS
- Risk factor is high compared to NSC and PPF
- Premature withdrawal is not allowed but it is allowed in other instruments in some specific conditions.
