There are 3 famous tax saving options in section 80C. Post office NSC, Life insurance and ELSS mutual funds. In this post, we will discuss why ELSS mutual funds is better tax saving option in India.
NSC – National Savings Certificates are bonds issued by the government to encourage the habit of saving among Indians. One can purchase these certificates from the post office, with the maturity period fixed at 5 and 10 years. It gives 6.8% compount interest annually. It is tax saving option, not an investment.
Life Insurance(LIC): Life insurance plans are simple plans wherein for a specific length of time, the policyholder must pay a premium. The premium you pay assists the insurance provider in meeting the family’s financial needs in case of an unfortunate demise of the life assured. In long term, it would give 3%-5% returns. It is not an investment option.
ELSS – An Equity Linked Savings Scheme is closely related to prevailing market conditions and is a diversified mutual fund which invests most of the corpus into equities. A lock in period of 3 years and different portfolio options can help one make money faster. Based on market conditions, it returns 10%- 15% annually. It is tax savings as well as investment options.
Purchasing life insurance solely to save tax is not recommended. ELSS is a better option to save tax.
Advantages of ELSS:
- ELSS funds have the shortest lock-in period of 3 years in comparison to other tax-saving instruments like tax-saving fixed deposit (5 years), PPF (15 years) and LIC(15 years).
- Unlike ELSS where the returns are linked to market performance, other 80C tax saving instruments like PPF, FD or NSC are fixed income products. ELSS has the potential to deliver significantly higher returns in the medium to long term horizon. NSC and Life insurance interest are very low compare with inflation rate.
- With the virtue of its lock-in period and disciplined long term investment, investors can benefit from the power of compounding in the long run.
- While investing in ELSS, investors may choose to SIP where it allows investors to invest every month.
- Investing in mutual funds is safe and transparent as all the companies come under the purview of SEBI. Also, the investments are professionally handled by a fund manager.
Term insurance is better than life insurance for your family financial needs
When compared to a traditional alternative like Insurance plans, ELSS funds invest in stocks, which exposes them to higher risk. ELSS, which has a market-linked return. In a medium to the long-term investing horizon, ELSS has the potential to generate significantly more wealth.
ELSS funds score over others because they bring in benefits of equity returns, low cost, transparency and the lowest lock-in period.
Individuals who are looking for a safe investment avenue to earn steady interest and save taxes can choose to invest in post office NSC. Post office NSC offers fixed interest returns and complete capital protection. Along with this, since this instrument is government-backed, it has low risk and helps to save taxes under Section 80C. If you are looking for safety and a guaranteed return, NSC scores higher in both cases. It offers a fixed return of 6.8% per cent per annum. You are looking for 5 years risk free capital protection, go for NSC.
Whom should invest in ELSS mutual funds:
- In case you do not have any equity investment, stocks or mutual funds, better to take ELSS mutual funds for wealth creation.
- In case you are less than 35 years old, take equity exposure by investing in ELSS funds. For making investments in ELSS I would suggest you the route of Systematic Investment Plan (SIP) so that your investment is spread over the year.
- In case you are looking for insurance, pay 20% for term insurance premium and invest 80% in ELSS mutual funds. You plan to invest 5,000 rupees every month for tax saving, 1000 rupees for term insurance and 4000 for ELSS mutual fund SIP.
In India, only 5% of Indians invest in equity market. ELSS mutual funds give opportunity to start the investment in equity market. It would give us the teste of equity markets and compound interest
List of ELSS mutual funds:
- IDFC Tax Advantage Growth Direct Plan
- Mirae Asset Tax Saver Growth Direct Plan
- UTI Long Term Equity Growth Direct Plan
- SBI Long Term Equity Growth Direct Plan
- Invesco India Tax Growth Direct Plan
- Canara Robeco Equity Tax Saver Growth Direct Plan
ELSS funds, What are the best tax saving options?, Which is the best tax saving instrument in India?