If you are looking for tax savings this season, then look no more. We have come up with an interesting blog on the evergreen topic of whether ELSS is better than any other tax-saving scheme. And what’s more interesting is that we have also summed up answers to every Why of yours. So what are you waiting for? Let’s skip this journey to the main content.
What options do you have for tax saving instruments?
Income Tax Act allows a deduction from the gross total income if the taxpayer invests in allowed tax saving instruments. There are multiple options in which the taxpayer can make the investments and save the tax impact.
Section 80C of the Income Tax Act prescribes various modes through which the taxpayer can save the tax which is as follows:
ELSS refers to Equity Linked Saving Scheme which are mutual funds that invest 80% or more in equity. These are very attractive from viewpoint of returns but carry little more risk as compared to other saving alternatives.
PPF refers to Public Provident Fund which requires the taxpayer to open the PPF account in any of the authorized banks. Lock-in period is 15 years with partial withdrawal allowed once in a lifetime.
Life Insurance Premium
Life Insurance Premium paid towards self and family are allowed as a deduction under section 80C of the Income Tax Act.
These are 5 years term deposits that can be maintained with any bank. However since the interest rates are falling, Bank Fixed Deposits are a little lesser attractive from the perspective of tax saving.
NSC refers to National Saving Certificate as another tax-saving instrument that has a lock-in period of 5 years. It has a guaranteed return which changes periodically.
ULIP refers to Unit Linked Insurance Premium which can be said as a combination of mutual fund and insurance. This is more of an insurance product with investment component in it.
Why ELSS is better than any other tax-saving instruments?
- Higher returns as compared to other conventional investment instruments
- ELSS has wide exposure to the stock market which makes it a very lucrative and attractive option for tax saving as well as wealth building.
Even though there was some impact on the stock market due to pandemic, the stock market has bounced back up. This has resulted in a huge surge in absolute returns derived by the ELSS especially.
In all, ELSS comes with higher returns even if not guaranteed, around 12-15%. In every sense, it beats the inflation rate.
High liquidity due to the lowest lock-in period
ELSS has the lowest lock-in period of 3 years which can be termed as lowest as compared to other tax-saving investments which are a minimum of 5 years.
Since ELSS has the lowest lock-in period, it is suited best to short-term to medium-term financial goals also. Hence, it allows the investor to manage the liquidity position in a short time span.
Highly flexible mode of investment
ELSS allows you to switch between the mutual funds pertaining to the same AMC (Asset Management Company) or any other AMC. Some of the ELSS also allow switch options within their AMC as a mandate action discretionary upon the investor.
Single Demat account required
ELSS investment needs to be made through a Demat account which can also be used for investing in shares and securities. So investors get to invest in various types of instruments in a single Demat account. This helps the investor to keep a single control over investments.
Why choose ELSS over other saving instruments?
|Type of Instrument||Linked to the stock market since almost 80% or more is invested in equity||Government-backed saving instrument||Combination of equity/Debt exposure and a portion of insurance where insurance is the core service area||5 years term deposit with any bank|
|Lock-In Period||3 years||15 years||5 years||5 years|
|Risk %||Moderate to high||Low since the returns are guaranteed by the government.||Moderate to high due to a combination of equity exposure and insurance portion.||Low since they carry a fixed rate of interest|
|Return||Highest return in the brackets of the tax-saving instruments around 10-13% or even more provided high-risk appetite is assumed||Fixed-rate of return is prescribed by the government which may or may not be changed periodically. However the current rate of return revolves around 7.10%-7.60%||Even if the ULIPs have absolute returns of 10-12%, most of the portion of returns is allocated towards mortality costs etc. hence it impacts the effective return in the long run.||Fixed Deposits have interest rates of 6.5% -7% currently. Due to falling interest rates, it is difficult to predict whether the bank FD rates will pick up 0r further go down which may seriously affect the effective return|
This gives us the fair idea that investors should go for ELSS if they have a moderate to high-risk appetite and desire to earn lucrative returns. ELSS is a dynamic form of investment that can be used as a tax-saving instrument as well as a wealth-building tool. It is always up to the discretion of the investor whether to go for a decent rating and moderate returns, which is a good combination of risk-reward ratio. Nevertheless, it comes at a low cost and also can be invested in lumpsum or SIP which makes it easier to maintain liquidity. In all, a win-win situation for the investor.