Some of the investments that Indian investors prefer to invest in to save tax under Section 80C of the Income Tax Act are Equity Linked Savings Schemes (ELSS), the Public Provident Fund (PPF) and the National Savings Certificate (NSC). Both of these instruments have their own advantages and adjust to various financial objectives and risk tolerances. So, without further ado, let us get into a comparative analysis so that you can decide which one of these is the most appropriate bet as per your investment requirements.
ELSS: The Equity-Linked Tax Saver
ELSS funds are equity-linked saving schemes, which are mutual funds. They give a tax deduction up to 1.5 lakh rupees Section 80C. Out of the numerous advantages of ELSS, a relatively small lock-in period of just 3 years is one of the factors that make ELSS an excellent instrument of choice during investment by those investors who are seeking tax advantages and have a reasonable investment time horizon. However, as they are equity-oriented, the ELSS funds are more volatile and risky than the fixed-income instruments.
PPF: The Safe and Steady Option
A public provident fund (PPF) is a government sponsored savings scheme, which guarantees returns and tax benefits. Contributions to PPF can be claimed as deduction under Section 80C and the interest earned is tax-free. PPF has a lock-in period of 15 years that is subject to extension in blocks of 5 years. This establishes PPF as one of the best investments to be adopted by conservative investors who seek a secured and stable investment channel with a long-term financial plan.
NSC: Fixed Returns with Government Backing
National Savings Certificate (NSC) is a fixed income security which is provided by the government. They are fixed-interest and lock-in period is 5 years. Similar to PPF, NSC investments are also eligible under Section 80C tax deduction. Interest gained is taxable, whereas the principle is guaranteed by the government, and capital is safe. NSC would be appropriate for those investors who have a medium-term investment horizon and want fixed returns.
Comparative Overview
| Feature | ELSS | PPF | NSC |
|---|---|---|---|
| Tax Deduction | Up to ₹1.5 lakh under 80C | Up to ₹1.5 lakh under 80C | Up to ₹1.5 lakh under 80C |
| Interest Rate | Market-linked (variable) | Fixed (currently 7.1%) | Fixed (varies periodically) |
| Lock-In Period | 3 years | 15 years | 5 years |
| Risk Level | High (equity market risk) | Low (government-backed) | Low (government-backed) |
| Returns Potential | High (market-dependent) | Moderate (fixed rate) | Moderate (fixed rate) |
| Tax on Returns | LTCG tax on gains above ₹1 lakh | Tax-free | Taxable |
Conclusion
Investment in ELSS, PPF, or NSC will have to be decided upon based on your specific financial aim, risk appetite, and investment time frame:
- Choose the best ELSS tax saving mutual funds when you seek better returns, and you are ready to take the market risks. It would suit an average risk investor and one with a 3-year investment timeline.
- Select PPF when you want a secure, government-guaranteed investment, guaranteed returns, and a long-term investment goal. It suits conservative investors who need tax-free income the best.
- Choose NSC when you want a fixed return on your investment, have a medium term investment goal and are okay with taxable interest earnings. It would be appropriate to an investor who seeks a balance between returns and safety.
In a nutshell, all these tax-saving vehicles possess their own benefits. Your financial objectives and risk tolerance should be measured to help you decide. It is important to remember that even in the case of investments, it may be a good idea to diversify so that your eggs are not all placed in one investment instrument and risk and returns can be balanced accordingly.
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