5 Difference between ELSS vs PPF vs NSC vs Tax Saving Fixed Deposit

ELSS (Equity Linked Saving Scheme), PPF (Public Provident Fund), NSC (National Saving Certificate), and Tax-saving fixed deposits with banks are four of the most popular way to save tax under section 80C, but which one is the best among these four? How do you choose whether to invest your 1.5 lakh rupees, the maximum amount allowed to invest under section 80C qualified for deduction from taxable income? In this article, I am going to share key differences between ELSS vs. PPF vs. NSC, and  Tax Saving Fixed deposits with both private and public sector banks. Once you know the differences, you can make an informed decision where to put your money depending upon your goals and risk appetite.

Though you are free to invest all of 1.5 lakh into one of this scheme or you can also diversify your investment to create a mix of fixed income and equities, like putting money on PPF, tax-saving FDs, and ELSS.

ELSS vs. PPF vs. NSC vs. Tax Saving Fixed Deposit

In order to understand the difference between PPF, NSC, ELSS, and Tax-saving fixed deposit, we need to compare them with some parameters. In this article, we will compare these four tax saving investment options, i.e. Public Provident Fund, National Saving Certificate, Equity Linked Savings Scheme and Tax Saving Fixed deposits into 5 important parameters, i.e. who can invest, how long your money will be locked, annual returns, tax status on maturity and safety of principal amount.

1. Eligibility Criterion

The fundamental difference between ELSS vs. PPF vs. NSC and Tax Saving Fixed deposit comes on their eligibility criterion. Every Indian citizen is allowed to open a PPF account with selected public and private sector banks. 

You can even open the PPF account in the name of minors, but NRI cannot open a new PPF account. Though they can invest in ELSS, NSC, and Bank's Tax Saving Fixed deposits. NRIs are also allowed to invest money on their existing PPF account, which they had opened when they were resident Indian. 

2. Lock-in Period

This is another key difference between PPF, ELSS, NSC, and Tax Saving Fixed deposits with banks; in fact, many people make investment decisions based upon the lock-in period. National Savings Certificate has a Lock-in Period of 5 or 10 years depends on the scheme you buy. 

Bank Tax saving Fixed deposit has 5 years of the lock-in period, but the clear winner in this category is Equity-linked saving scheme, which has just 3 years of lock-in period and if you invest in a dividend-rich fund you will get most of your money in the form of a dividend in a couple of months. 

While the Public Provident Fund has 15 years of Lock-in Period, but partial withdrawal is permitted after 5 years.

3. Interest rate and Returns

The most crucial difference between ELSS, PPF, NSC, and Tax Saving FD comes how much return they can offer. If you are investing money, then the interest rate is a significant factor because this will decide whether your investment is profitable or not. 

Given inflation, the value of money is going to decline in the future, so if the return on your investment can beat inflation, it's a profitable investment. Public Provident fund decides its interest rate annually, but it's usually around 8.5 to 9%. 

National Saving certificates give approximately 8.5 to 8.8% returns per annum, while bank tax-saving fixed deposit offer around 7.5% per annum. The clear winner in this category is the Equity Linked Savings Scheme or ELSS, which offers around 10 to 15% on average, but they are subject to market risks.

4. Tax status on Maturity

Another key difference between ELSS, PPF, NSC, and Tax Saving Fixed deposit comes from the fact whether the maturity amount is taxable or not. Many people ignore taxation while considering interest rates and total returns, but that is a mistake. 

You should always calculate returns post-tax because that's what you get. Public Provident Fund or PPF maturity amount is tax-free, i.e. when you withdraw your money from PPF after 15 years, you don't need to pay any tax on that money, but National Savings Certificate and Bank Tax Saving Fixed deposits' maturity amount is taxable. 

This means total interest earned will be added to your taxable income. ELSS again scores here because when you break ELSS mutual fund after the lock-in period, i.e. 3 years, the amount you get is tax-free. They are considered as long-term equity gains. 

5. Safety, Security, and Risk

No doubt that safety and security is one of the most important parameters when it comes to investment. You can also differentiate ELSS, NSC, PPF, and Tax Saving Fixed Deposit depending upon associated risk and safety of the investment. 

Out of these four tax saving investment options, Public Provident Fund is considered the safest because it's backed by the Government of India. NSC and Tax Saving Fixed deposit is also a safe option because they offer guaranteed interest rate and return but ELSS even though it has the potential to earn more money is subject to market risk. In the worst case, you can also lose your principal amount, e.g. when you invest just before a market crash.

Here is a beautiful table that compares ELSS, PPF, NSC, and Bank Tax Saving Fixed Deposit into three critical parameters, i.e. lock-in period, returns CAGR per annum, and Tax Status on returns. 

That's all about the difference between ELSS (Equity Linked Savings Scheme), PPF (Public Provident Fund), NSC (National Saving Certificate), and Bank Tax Saving Fixed Deposits. They are the four most popular tax saving options for Indians. In this article, we have compared them on 5 essential parameters, i.e. eligibility criterion, who can invest, lock-in period, how long your money will be locked from withdrawal, annual returns they offer, tax status on maturity, and risk associated with them.

In short, PPF is the safest option best for long term investment, ELSS can offer the highest returns in the long term, and NSC and Tax saving FDs are in between.

Other NRI Income tax articles you may like

• 3 Income tax benefits of opening NRI accounts in India
• 13 ways to save income tax in India
• 10 Income tax deductions and exemptions NRIs should know
• How NRIs can file their income tax returns online.
• Is NRIs overseas income taxable in India
• How much TDS is deducted on the NRO account?
• Is it mandatory to file income tax returns for NRIs?
• Is it mandatory for NRIs to declare foreign bank accounts on tax returns?
• How to determine the residential tax status of NRIs?
• 10 points NRIs should know about Income tax?
• Is Aadhaar card Mandatory for filing an Income tax return for NRIs?

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