Is ELSS Better Than its Competing Tax-saving Products?
Last Updated : Nov. 12, 2019, 2:58 p.m.
As the financial year 2019-20 a few months away from being over, you must be busy planning to reduce the tax outgo in the next financial year if you have not invested in any of the tax-saving products so far. In case you have, you’ll be interested to know the tax you could save by the time the ongoing financial year rounds up. The common tax-saving products include Equity-linked Savings Scheme (ELSS), Public Provident Fund (PPF), Tax- saver Fixed Deposit, National Savings Certificate (NSC), etc. All these products help you save tax under Section 80C of the Income Tax Act. Plus, all these products come with a lock-in period, which means you can’t withdraw before a specific period.
Amongst the tax-saving products, ELSS comes with the shortest lock-in period of 3 years and has the potential to raise the corpus much more than its competing products. Does that mean ELSS is the best tax-saving alternative you’ve got? Let’s find out by comparing it with its rivals.
Comparison Between ELSS & Other Tax-saving Products
The table below compares ELSS and other products in terms of tax exemption limit, lock-in period, investment limit, etc.
| Investment Aspects | ELSS (Mutual Fund) | PPF | Tax-saver FD | NSC |
|---|---|---|---|---|
| Tax Exemption Limit | Upto ₹1.5 lakh in a financial year | Upto ₹1.5 lakh in a financial year | Upto ₹1.5 lakh in a financial year | Upto ₹1.5 lakh in a financial year |
| Lock-in Period | 3 Years | 15 Years | 5 Years | 5 Years |
| Investment Limit | No Max. limit | Upto 1.5 lakh in a financial year | Upto 1.5 lakh in a financial year | No Max. Limit |
| Return Rate | No fixed rate of return, but has the potential to deliver substantially higher returns | 7.90% per annum presently, the government will change the rate periodically | 5%-7% per annum | 8% per annum, the government will change the rate periodically |
| Suitable to Whom | Individuals with a high risk appetite | Individuals wanting fixed income | Individuals wanting fixed income | Individuals wanting fixed income |
A separate discussion on each of these products will further help you compare better.
ELSS – It’s an equity mutual fund scheme that invests predominantly in equity and equity-related instruments of companies to appreciate the growth of invested capital over time. The investments can’t be redeemed before 3 years as suggested by the lock-in period mentioned in the table. Now, the dynamics of redemption can vary depending on the mode of investments you go with. If you opt for a lump sum investment, you can redeem exactly three years from the time of its holding. Whereas, with an SIP, the redemption will happen on installment basis.
For example, you opt for a monthly Systematic Investment Plan (SIP) in November 2019, the first installment will be redeemable on November 2022, the second will be on December 2022 and so on. There won’t be any tax for gains upto ₹1 lakh. In case the gains exceed ₹1 lakh, you will be charged a capital gain tax at 10%.
PPF – This is a provident fund scheme that you can subscribe to at any of the banks in India. Even though it comes with a lock-in period of 15 years, you will be allowed partial withdrawal from the 7th financial year onward. There won’t be any tax on the PPF yields.
T ax-saver FD – It’s a 5-year fixed deposit program wherein you can save tax under Section 80C. But the interest earned over ₹40,000 (regular) and ₹50,000 (senior citizens) in a financial year will be taxable.
NSC – This is a post office savings scheme wherein you can invest a minimum of ₹100. Adults can purchase NSC for themselves or for their dependent minors. The interest is accrued every year but is likely to be reinvested under Section 80C.
How Do Tax Benefits Pan Out Under Section 80C?
The investment amount you make in a financial year will be subtracted from the gross annual income. This reduces the taxable income and the tax amount. An example below will help you understand it better.
Example – Your gross annual income is ₹9 lakh a year. You invested ₹2 lakh in any of (ELSS, PPF, Tax-saver FD and NSC) in a year. How will the taxman treat this transaction?
| S.No. | Particulars | Amount (In ₹) |
|---|---|---|
| 1 | Gross Annual Income | 9,00,000 |
| 2 | Standard Deduction | 50000 |
| 3 (1-2) | Resultant Amount | 8,50,000 |
| 4 | 80C Deduction | 1,50,000 |
| 5 (3-4)` | Taxable Income | 7,00,000 |
| 6 | Upto 2.5 lakh - No Tax Above 2,50,000-5,00,000 (5% of 2,50,000) - 12,500 Above 5,00,000-7,00,000 (20% of 2,00,000) - 40,000 | 52,500 + 4% surcharge = 54,600 |
In the absence of 80C benefits, you will be paying an increased tax worth ₹85,800.
Note – If the income after deducting the eligible tax breaks comes out to be ₹5 lakh and less, there won’t be any tax as was announced in the Union Budget 2019. In case the amount exceeds ₹5 lakh, the tax will apply at the applicable rates. The increase in the tax break limit does not mean there’s a change in the slab rate.
Disclaimer – Mutual fund investments are subject to market risks. Please read the scheme related documents carefully before investing