Category: Personal Finance

ELSS vs 5 year Tax Saving FDs

Individuals and HUFs can claim a tax exemption of up to Rs.1,50,000 in a financial year by investing in tax-saving fixed deposits with banks. This deposit, however, cannot be withdrawn early. However, you can take out loans against your FDs, which is a plus. The interest gained on these deposits, though, is taxed according to the individual’s tax slab rate. Also, after paying a 10% LTCG tax on income above 1 lakh, ELSS has the ability to outperform other tax-saving strategies in terms of returns. Under the terms of Section 80C of the Income Tax Act of 1961, both tax-saving FDs and ELSS have tax deductions. These instruments’ returns, on the other hand, are taxed accordingly. Because interest is applied to your net revenue and taxed as per your tax slab rate, tax-saver FDs are not so attractive as ELSS when it comes to seek tax benefits for individuals under higher tax brackets. ELSS is a good option for long-term investors with a higher risk tolerance attitude. Tax-saving FDs are a good option for individuals nearing retirement because they have low risks and assured returns. ELSS, on the other hand, is better for those who desire both wealth creation and tax gains. However, you must weigh considerations such as the age, investment tenure, and risk appetite before embarking on new investments.

ELSS vs PPF

Both the LSS and the PPF are excellent tax-saving investment vehicles. While risk-averse investors prefer to put their money towards PPF, conservative investors prefer to put their money towards ELSS. Over the long run, equity has been the highest performing fund. Double-digit returns are popular in ELSS schemes. But for the fourth quarter of FY 2020-21, PPF is actually offering a 7.1 percent interest rate which makes it a risk-free choice backed-by the government of India. Under Section 80C of the Income Tax Act, 1961, contributions to ELSS of up to Rs.1,50,000 a year are tax-free. If your gains surpass Rs.1 lakh a year, you’ll have to pay a 10% LTCG tax. However after the three-year lock-in period has ended, you can continue to invest in ELSS. But compared to a fixed deposit or a PPF, the risk associated with ELSS is higher. Under Section 80C of the Income Tax Act, 1961, you can subtract up to Rs.1,50,000 a year for contributions made into your Public Provident Fund account. A PPF account should be locked in for a minimum of 15 years. After the lock-in duration, you can extend it for another five years. PPF and ELSS are both outstanding tax-saving vehicles. Furthermore, as an investor, you must choose which one to choose or whether to invest in both. The possibility of premature withdrawal is an important factor to remember. While the PPF allows for a 50% withdrawal after the five-year lock-in duration, the ELSS does not approve partial withdrawals. You’ll have to wait until the three-year lock-in cycle is over. You can invest in any of them as an investor depending on your risk profile, which is your skill and personal initiative.

ELSS vs NPS

ELSS and NPS are two totally separate products with entirely different goals, but when it comes to deciding where to invest, we are always torn between the two. This is due to the fact that they are both equity-linked products that can be deducted under section 80C of the Income Tax Act. Under ELSS the maturity period comes with a tenure of 3 years. Alternatively, at the age of 60, 60% of the tax-free corpus can be withdrawn however 40% must be paid as a taxable annuity. Furthermore, ELSS funds are ideally fit for building long-term capital. ELSS are completely equity funds that invest almost entirely in equities over time, with nearly 95-100 percent. But on the other side, NPS holders will only have a maximum of 75% equity in their NPS portfolio allocation, with the remainder being debt. Furthermore, such a high degree of equity allocation is only open to people under the age of 35 who prefer the NPS Active option. Though you can spend as much as you like in ELSS funds, the tax-free amount is capped at Rs 1.5 lakh per financial year. If opposed to other tax-saving investments, ELSS funds have a distinct benefit of decent returns and tax benefits. National Pension Scheme (NPS) on the other hand is a government-backed scheme that investors consider for their retirement. NPS investments qualify for a tax deduction of Rs 1,50,000 under Section 80C of the Income Tax Act, as well as an additional Rs 50,000 deduction under Section 80CCD (1B). Amounts deposited in an ELSS cannot be withdrawn early. Whereas, under the NPS, you can withdraw early if you meet certain criteria to buy an annuity. ELSS has always been the better investment alternative, despite the fact that NPS offers tax benefits of up to Rs 2 lakh per year, while ELSS offers tax benefits of up to Rs 1.5 lakh. For a three-year lock-in cycle, the latter allows stability and the ability to gain better returns over the long run.

Conclusion

When determining which choice is best for saving taxes under Section 80 C, the investor must stick to the basics of risk profile, financial targets, returns and so on. A wise and experienced investor will still diversify his or her portfolio and maintain a diverse portfolio. It is critical to choose a scheme based on expected returns, risk tolerance, and investment time period. Tax planning is an important component of personal finance, and it’s critical to choose a strategy that suits the risk profile and liquidity requirements. Hence, it is recommended to consider the benefits and drawbacks of an investment vehicle first when making a decision.