Wednesday, February 8, 2017

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 take 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 e.g. by 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 principle amount.

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 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 have opened when they were resident Indian. 

Lock-in Period
This is another key difference between PPF, ELSS, NSC and Tax Saving Fixed deposit with banks, in fact, many people take investment decision based upon lock-in period. National Savings Certificate has Lock-in Period of 5 or 10 years depends on the scheme you buy. Bank Tax saving Fixed deposit has 5 years of lock-in period but 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, Public Provident Fund has 15 years of Lock-in Period but partial withdrawal is permitted after 5 years.

Interest rate and Returns
The most important 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 very important factor because this will decide whether your investment is profitable or not. Given inflation, the value of money is going to decline in 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 around 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 Equity Linked Savings scheme or ELSS which offers around 10 to 15% on average but they are subject to market risks.

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 rate and total return 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 a 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 Nationa Savings Certificate and Bank Tax Saving Fixed deposit's maturity amount is taxable. Which means total interest earned will be added to your taxable income. ELSS again scores here because when you break ELSS mutual fund after lock-in period i.e. 3 years, the amount you get is tax-free. They are considered as long-term equity gains. 

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 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 have potential to earn more money is subject to market risk. In the worst case, you can also lose your principle amount e.g. when you invest just before a market crash.

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

Difference between ELSS, PPF, NSC and Tax Saving Fixed Deposit

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 important 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 highest returns in the long term and NSC and Tax saving FDs are in between. 

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