Mirror Mirror on the wall, which is the best tax saving option of them all?
It’s that time of the year when your HR wants you to submit your investment proof to get you 80C tax benefit. You can no longer avoid this important investment decision. With so many options available where do you put your precious 1.5 lakhs and how do you decide which product to select?
NSC (National Saving Certificate), tax saving FD (Fixed Deposit), PPF (Public Provident Fund) and ELSS Mutual Funds(Equity Linked Saving Scheme) all offer 80C benefit. But which one is better for you?
We will look into some important criterion that you should consider before you invest; then you can make an informed decision.
Lock-in period is an important factor when you are looking to invest for a short term financial goal like saving for a vacation or down payment for a car because you don’t want your money to get stuck in your investment. NSC and tax saving FD have a lock-in period of 5 years after which they mature. Of all the investment options, PPF has the longest lock-in period of 15 years. The winner in this category is ELSS Mutual Fund with a lock-in of 3 years. After 3 years you can either sell your investment to fulfill your dream or if you are happy with the performance of your fund you could continue to stay invested for as long as you wish. The key is to choose an option that matches the time horizon of your financial goal.
Return on Investment
NSC and PPF offer an interest rate of 8%. While the rates of tax saving FD can range from 6.5-7.7% depending upon the bank. The return of ELSS Mutual Fund is based on the market conditions and is subject to short term market fluctuations; but it’s the long term return that you should be focused on. You need to keep in mind that ELSS is a long term investment and short term fluctuations are just a phase. On the upside an ELSS can give a return of 15% and even more.
The biggest risk for a retail investor is the risk of re-investment. With the rates set to go lower, what will you do with the money after 5 years when the tenure ends? The return of NSC, PPF and FD are reset every quarter to sync with the rate changes of the government securities(G-Secs); hence there is no guarantee that you will get the same return later too. Here the clear winners is ELSS; it gives you equity exposure which does not get impacted by the ups and downs of the interest rates of the G-Secs, thus helping your money grow further.
NSC and FD cannot be touched for 5 years and any interest earned gets automatically reinvested. PPF offers partial withdrawal from the 7th financial year and also has loan facility against your investment. In ELSS, after you have completed 3 years of your lock-in you could sell your investment fully or partially as per your wish. In Mutual Funds its advisable to always choose the growth option where any dividend that you earn gets reinvested helping your investments multiply. ELSS and PPF definitely have an upper hand in this criteria as they give you freedom to choose as per your financial needs.
Many people ignore taxation while considering interest rate and total post tax return; this is a huge mistake. If your investment attracts tax, then the post tax return will tell you exactly what amount you will get on maturity. PPF and ELSS Mutual Fund are the only two products that are exempt from taxation and hence earn you a higher return. The return earned from NSC and FDs goes lower as your tax bracket increases.
Real Rate of Return
Real rate of return tells you by what percentage your money will grow post inflation. It 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 the future, so if the return on your investment can beat inflation it’s a profitable investment.
In the table below, you can see the impact taxation and inflation has on your investment.
As you can see that ELSS Mutual Fund will give your money a better chance to grow and has the potential to bring you closer to your financial goal.
If you are a new investor, then ELSS Mutual not only gives you equity exposure but also give you debt coverage, thus, diversifying your investment without any extra effort. If you had been thinking about investing in mutual funds but were hesitant, then ELSS Mutual Fund is a good way to start.
How can Mintwalk help you?
Mintwalk app makes your life easier by recommending the best tax saving funds for you that are rated based on their historic performance, risk to return ratio and fund size. The whole process is digitalized, simple and easy. Just download the app, click on Tax Saving Funds option and select any of the listed ELSS Mutual funds. All this and more available at the touch of your finger.