Elss Funds Vs Other Tax-Saving Investments: Which Is Better?

By Team Newsable | First Published Apr 24, 2023, 6:03 PM IST

Here, we undertake a comprehensive analysis that will enable a comparative evaluation of Equity Linked Saving Scheme (ELSS) funds vis-a-vis other tax-saving investments. By means of this analytical exercise, we strive to provide you with the necessary insights that will empower you to make an informed and judicious decision regarding your tax-saving investment options.

Introduction

The sphere of tax-saving investments has remained a constant source of attraction among individuals in India, particularly during the culminating quarter of the financial year. The gamut of options available for tax-saving investments includes Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity Linked Savings Scheme (ELSS), amongst others. However, among these tax-saving options, ELSS has managed to stand out due to its unique ability to generate better returns compared to traditional investment instruments. As a consequence of this, the momentum of ELSS has been on an upward trajectory, as more and more investors aim to leverage the growth prospects of the equity markets. One can gain significantly if they invest in best performing ELSS Funds.

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What is ELSS?

Equity Linked Saving Scheme (ELSS) is a mutual fund variant which invests in a diverse portfolio comprising equity and equity-linked instruments. A fundamental attribute of ELSS funds lies in their eligibility for availing tax deductions under the purview of Section 80C of the Income Tax Act, 1961, which empowers individuals to claim deductions up to a limit of Rs. 1.5 lakh from their taxable income. This advantageous feature of ELSS funds has been a significant contributing factor to its growing popularity amongst investors who seek to optimize their tax-saving endeavors whilst simultaneously generating considerable returns from their investment.

Other Tax-Saving Investments

Apart from ELSS, there are various other investment options available to save tax. Let's have a look at them:

Public Provident Fund (PPF):

The Public Provident Fund (PPF) is a government-sponsored investment vehicle that provides tax-exempt returns. The rate of interest undergoes periodic revision every quarter, presently standing at an annualized 7.1%. A minimum investment threshold of Rs. 500 must be met, while the maximum investment amount permitted per fiscal year is Rs. 1.5 lakh.

National Savings Certificate (NSC):

The National Savings Certificate (NSC) is a fixed-income investment scheme that enjoys the imprimatur of the Government of India. Investment in NSC is qualified for tax deductions as per Section 80C of the Income Tax Act. The rate of interest undergoes revision every quarter, presently set at an annualized 6.8%. The minimum investment threshold is Rs. 100, while the upper limit for investment remains unrestricted.

Unit Linked Insurance Plan (ULIP):

Unit Linked Insurance Plan (ULIP) is a hybrid investment and insurance product that confers tax benefits under Section 80C of the Income Tax Act. ULIPs allocate investments in a blend of equity and debt instruments, with returns tethered to market fluctuations. The minimum investment threshold is not uniform across the various ULIPs available in the market.

ELSS Vs. Other Tax-Saving Investments

· Returns:

ELSS funds have the potential to engender superior returns than orthodox tax-saving investments by virtue of their embedded equity exposure. However, their susceptibility to market vagaries is an omnipresent threat, and returns are bereft of any assurances. PPF and NSC present steady yet muted returns that trail behind the historical yields produced by equities. On the other hand, ULIPs exhibit a potential to deliver amplified returns when compared to PPF and NSC due to their strategic equity positioning. Nonetheless, the returns of ULIPs remain tethered to the gyrations of the market and provide no warranty of any nature.

· Lock-in Period:

ELSS funds enforce a lock-in period of 3 years, the most abbreviated span among all tax-saving investments. In contradistinction, PPF demands a lock-in period of 15 years, NSC requires a lock-in period of 5 years, and ULIPs have a lock-in period of 5 years or beyond, subject to contextual specifics.

· Risk:

ELSS funds are prone to market risks as they concentrate their investments in equity and related equity instruments. Conversely, PPF and NSC have government backing, instilling a palpable sense of security in investors due to their minimal exposure to potential risk factors. ULIPs are linked to market dynamics, conferring a market-driven character to their returns and imperiling their performance in the face of market volatility.

· Liquidity:

ELSS funds enact a lock-in period of 3 years, following which they extend unfettered liquidity. PPF and NSC entail a lock-in period, debarring investors from indulging in premature withdrawals. ULIPs, following the expiration of the lock-in period, enable partial withdrawals to investors, espousing a selective approach to liquidity.

· Tax Benefits:

ELSS, PPF, NSC, and ULIPs are among the gamut of investment instruments that proffer tax benefits under Section 80C of the Income Tax Act. The maximal deduction threshold stands at Rs. 1.5 lakh, embodying a ceiling on the extent of tax relief available to investors opting for these avenues.

Conclusion

Equity Linked Saving Scheme (ELSS) has emerged as a popular option among investors due to its potential for higher returns and short lock-in period. However, it is subject to market risks and not suitable for risk-averse investors. Traditional tax-saving investments such as Public Provident Fund (PPF) and National Savings Certificate (NSC) offer fixed returns with minimal risk, but have longer lock-in periods.

Unit Linked Insurance Plan (ULIP) offers the potential for higher returns with the flexibility of partial withdrawal after the lock-in period. It is important for investors to evaluate their risk appetite, investment horizon, and financial goals before choosing a tax-saving investment. It is recommended to consult a financial advisor for personalized investment advice.

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