Introduction:
Tax-saving investments have always been a popular choice for individuals in India, especially towards the end of the financial year. There are multiple options available like Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity Linked Savings Scheme (ELSS) which one can choose to fulfill their investment goals. By exploring these options, you can discover the ideal investment that suits your preferences and empowers you to optimize your financial resources.
These investment avenues offer different benefits and features, allowing you to customize your approach based on your individual preferences and goals. Interestingly, ELSS stands out from these options due to its potential to generate higher returns as compared to traditional investment instruments. This unique feature has caught the attention of investors, leading to a growing interest in ELSS. By capitalizing on the growth prospects of the equity markets, investing in the top-performing ELSS funds can offer substantial benefits.
Here, we evaluate Equity Linked Saving Scheme (ELSS) funds in comparison to other tax-saving investments. Our utmost goal in this article is to share invaluable insights that will leave you well-prepared to make informed and wise decisions when it comes to navigating the intricate world of tax-saving investments. We aim to unravel the complexities surrounding these choices, providing you a sense of clarity.
A Brief Introduction to Tax Saving Investment Schemes in India
ELSS:
ELSS, also known as Equity Linked Saving Scheme diversifies investments across equity and equity-linked instruments. What sets ELSS funds apart is their eligibility for tax deductions under Section 80C of the Income Tax Act, 1961. This provision allows individuals to claim deductions of up to Rs. 1.5 lakh from their taxable income. The appealing combination of tax benefits and potential returns has contributed significantly to the increasing popularity of ELSS among investors, who aim to optimize their tax savings while generating substantial investment growth.
Unit Linked Insurance Plan (ULIP):
Unit Linked Insurance Plan (ULIP) combines investment and insurance features which makes it unique. ULIPs provide the flexibility to invest in a mix of equity and debt instruments, with returns linked to market performance. It’s important to note that the minimum investment requirement may vary among the different ULIP options available in the market. This unique offering has made ULIPs a popular choice for individuals seeking a comprehensive solution that aligns with their financial goals and tax-saving objectives.
Public Provident Fund (PPF):
Public Provident Fund (PPF) is initiated by the government, and is vastly known for its tax-exempt returns. The interest rate of the PPF is subject to periodic revisions, with the current annualized rate standing at 7.1%. To get started, a minimum investment of Rs. 500 is required, while the maximum investment limit allowed per fiscal year is Rs. 1.5 lakh. These features make the PPF an attractive option for individuals looking to grow their savings while enjoying tax benefits, ensuring a secure and fruitful investment journey.
National Savings Certificate (NSC):
The National Savings Certificate (NSC) is a reputable investment scheme endorsed by the Government of India, offering a fixed income avenue. Investing in NSC qualifies for tax deductions under Section 80C of the Income Tax Act. You can start with Rs. 100, while there is no upper limit on the investment amount. These features make NSC an attractive choice for individuals seeking a reliable investment option with tax benefits, allowing them to secure their financial future with peace of mind.
Advantages of ELSS over other Traditional Tax-Saving Instruments
Returns On Investment:
ELSS funds have the capacity to generate higher returns compared to traditional tax-saving investments due to their equity market exposure. As ELSS funds are influenced by market fluctuations, they pose a constant risk, and returns cannot be guaranteed. PPF and NSC, while offering stable returns, typically lag behind the historical yields generated by equity investments. On the other hand, ULIPs have the potential to deliver enhanced returns in comparison to PPF and NSC, thanks to their strategic allocation to equities. Nevertheless, it’s crucial to note that the returns of ULIPs are tied to market volatility and do not come with any form of assurance.
Lesser Lock-in Period:
ELSS funds have the shortest lock-in period of 3 years as compared to PPF which has a lock-in period of 15 years, NSC 5 years, and ULIPs 5 years or more.
Risk:
ELSS funds carry a certain degree of market risk as they focus their investments on equity and related instruments. PPF and NSC provide investors with a sense of security as they are backed by the government and have minimal exposure to potential risk factors. ULIPs, being linked to market dynamics, derive their returns from market performance, which exposes them to potential fluctuations and volatility.
Liquidity:
After a lock-in period of 3 years, ELSS funds offer investors unrestricted liquidity, allowing them to withdraw their funds as desired. On the other hand, PPF and NSC have lock-in periods that prevent investors from making premature withdrawals. ULIPs, once the lock-in period expires, provide investors with the option of partial withdrawals, adopting a selective approach to liquidity management.
Tax Benefits:
ELSS, PPF, NSC, and ULIPs are part of the wide range of investment options that offer tax benefits under Section 80C of the Income Tax Act. These options allow investors to claim deductions up to a maximum threshold of Rs. 1.5 lakh, limiting the extent of tax relief available to those who choose these investment avenues.
Conclusion
The Equity Linked Saving Scheme (ELSS) has gained considerable popularity among investors owing to its ability to potentially generate higher returns and short lock-in period. However, it should be noted that ELSS is associated with market risks, and is majorly suitable for investors with a high risk appetite. In contrast, traditional tax-saving investments such as the Public Provident Fund (PPF) and National Savings Certificate (NSC) offer reliable and steady returns with low risk. However, these investments do require a longer lock-in period.
Unit Linked Insurance Plan (ULIP) presents an opportunity for investors to potentially achieve higher returns while enjoying the flexibility of partial withdrawals once the lock-in period expires. It is important to carefully assess the risk tolerance, investment time frame, and financial objectives before selecting a tax-saving investment. Seeking guidance from a professional financial advisor is strongly advised to receive tailored investment advice that aligns with individual circumstances and goals.
