ELSS Funds vs Other Tax-Saving Options: Which Offers Better Returns?
When it comes to saving on taxes in India, you have a lot of options but which one is the best can be difficult to judge.
Equity Linked Savings Schemes (ELSS) have the potential for high returns and provide tax benefits under Section 80C. However, ELSS funds come with risks and longer lock-in periods. There are also other tax-saving instruments like the Public Provident Fund (PPF), National Savings Certificate (NSC), and Tax-saving Fixed Deposits which offer different kinds of benefits and a certain safety.
In this article, we will make a comparison of ELSS mutual funds with these alternatives to see which one has the potential to fetch you better returns as per your financial goals and risk appetite.
Understanding Equity Linked Savings Scheme (ELSS)
An Equity Linked Savings Scheme (ELSS) is a type of investment that provides tax benefits under Section 80C of the Income Tax Act, 1961. Individuals or Hindu Undivided Families (HUFs) can claim a deduction of up to Rs. 1.5 lakhs from their total income.
For example, if an investor puts Rs. 50,000 into an ELSS, this amount can be deducted from their taxable income, thereby reducing their tax liability.
ELSS funds come with a lock-in period of three years from the date of allotment. Once this period ends, investors can redeem or switch their units.
These schemes offer both growth and dividend options. Additionally, investors can contribute through Systematic Investment Plans (SIPs), and any investments up to ₹1.5 lakhs in a financial year qualify for the tax deduction.
Overview of Other Tax-Saving Options
Following is the list of some of the best tax saving investment options and plans for 2024 that can help individuals to maximize their tax benefits:
- Public Provident Fund (PPF): PPF is a government-backed investment, with tax free returns and eligible for deduction under section 80C up to ₹1.5 lakh.
- National Savings Certificate (NSC): An investment with fixed income offered by post offices that qualify for tax deduction under Section 80C and have a lock-in period of 5 years.
- Tax-Saving Fixed Deposits (FD): Fixed deposits with a 5-year lock-in period offering tax deductions up to ₹1.5 lakh under Section 80C, though interest earned is taxable.
- National Pension System (NPS): A voluntary retirement savings scheme with tax benefits under Section 80C and an additional deduction under Section 80CCD(1B), allowing investment in a mix of equity and debt instruments.
Now, let’s compare these tax-saving options with ELSS and find out their key differences:
ELSS Funds vs Other Tax-Saving Options
| Feature | ELSS Funds | Public Provident Fund (PPF) | National Savings Certificate (NSC) | Tax-Saving Fixed Deposits (FD) | National Pension System (NPS) |
| Lock-in Period | 3 years | 15 years | 5 years | 5 years | Until retirement |
| Returns | Market-linked, potentially higher returns | Fixed, currently around 7.1% p.a. | Fixed, currently around 6.8% p.a. | Fixed, varies between 6-7.5% p.a. | Market-linked, with a mix of equity and debt |
| Risk | Medium to high (equity exposure) | Low (government-backed) | Low (government-backed) | Low (bank-backed) | Medium (diversified portfolio) |
| Tax Benefits | Up to ₹1.5 lakh under Section 80C, LTCG tax of 10% on gains above ₹1 lakh | Up to ₹1.5 lakh under Section 80C, tax-free returns | Up to ₹1.5 lakh under Section 80C, interest is taxable | Up to ₹1.5 lakh under Section 80C, interest is taxable | Up to ₹1.5 lakh under Section 80C and additional ₹50,000 under Section 80CCD(1B) |
| Liquidity | Low (3-year lock-in) | Very low (15-year lock-in) | Low (5-year lock-in) | Low (5-year lock-in) | Very low (until retirement) |
Which Tax-Savings Scheme Offers Better Returns?
Among the tax-saving options, ELSS Funds generally offer the potential for higher returns compared to the others due to their equity exposure.
Since ELSS funds invest primarily in the stock market, they can provide substantial returns over the long term, especially during bullish market phases. However, this also means they come with higher risk and volatility.
On the other hand, options like PPF, NSC, and Tax-Saving FDs offer fixed and stable returns, making them suitable for conservative investors. The NPS provides a balanced approach with a mix of equity and debt investments, potentially offering moderate returns with relatively lower risk compared to pure equity investments.
At the end, the choice depends on your risk tolerance, investment horizon, and financial goals.
Also Read: Top Benefits of Stair Nosing for Safety and Protection
Conclusion
While ELSS funds offer the potential for high returns and significant tax benefits, other options like PPF, NSC, and Tax-saving Fixed Deposits provide different advantages depending on your risk appetite and investment horizon. If you are looking to invest in mutual funds, choose the best platform for mutual funds, offering easy access and comprehensive options. Consider your financial goals and risk tolerance to choose the best tax-saving strategy for you.
