With 11 products which offer tax benefit under Section 80 C, we are spoilt for choice when it comes to saving tax.
Apart from helping save tax, you need invest in a product which offers the best possible returns. So you need to zero down on which is the ideal product out of these 11 options!
Here is a quick guide on what these 11 products have to offer:
|Instruments||Indicative returns in %based on past five year performance||Taxation at redemption stage||Risk|
|ULIP||8%||Tax Free subject to certain condition||Moderate – depend on type of product you choose|
|RGESS*||3.5 last 2 yr returns.||Tax free||High|
|Senior Citizen Saving Scheme||9.3||Tax deduction||Low|
|Post office NSC||8.50||Tax deduction||Low|
While choosing a product there are four important criteria which you should consider:
Your Risk Appetite
If your are young and willing to take risk then ELSS and NPS are ideal. Both products have exposure to equities; in ELSS more than 80% is invested in equities while in NPS the equity
exposure is capped at 50%. On the other hand, PPF offers fixed returns which is better suited for conservative investors.
The PPF qualifies as EEE (exempt, exempt, exempt) which means the investment, returns and withdrawals are exempt from any tax. Similarly, any capital appreciation in ELSS is tax free.
The NPS loses out because it has EET status, which means that the withdrawals are taxable in the hands of investors. “NPS is a defined contribution pension plan which was launched in 2004. It did not take off until the government announced additional 50,000 tax benefit which caught the eyes of investors. But the biggest problem in NPS is the EET status.
ELSS has edge over other tax savings instruments when it comes to tenure. It has the lowest lock-in period of three years. Since your clients can remain invested even after the three year
lock in ELSS, investments in ELSS can be linked to achieve long term financial goals like retirement planning, child education and marriage, buying a house and a foreign holiday.
RGESS too has a lock-in of three years. Similar to ELSS, investments in RGESS can be extended beyond the lock in period. However, there are a lot of hassles in RGESS. Firstly, it is difficult to find out who is the first time investor through a demat account. Only first time retail investors who have income up to Rs. 12 lakh are eligible to avail tax benefits in RGESS. Investors get 50% tax benefit on a maximum investment of up to Rs. 50,000. Investors who do not qualify for tax benefits are also allowed to invest in RGESS.
NPS is a retirement linked product and hence has the longest tenure of up to 60 years of age.
PPF has a lock-in of 15 years subject to date of contribution. If contribution is made before the first five working days of April, it will have a lock-in of 15 years. Any contribution after this period
will have an effective lock-in period of 16 years. Also, subscribers can extend their PPF account even after its maturity in a block of five years for any number of blocks.
To be fair, we cannot strictly compare the returns of ELSS, PPF and NPS as each product is different with varying degree of risk.
The returns from ELSS are not guaranteed since more than 80% of assets are invested in equities. On the other hand, PPF is a debt product and comes with a high degree of safety.
Currently, the government is offering 8.7% in PPF. The only product which scores over others in terms of offering beating inflation is ELSS. Equity has given better returns over the long term but it also depends on the time of entry and exit. For instance, if your clients invest in ELSS at rally and redeem in bear market they will burn their fingers.
Let’s look at the advantages of NPS. NPS is a market-linked product which does not offer Guaranteed returns. It comes with three options with different exposure to equity, corporate
debt , fixed income instruments and government securities. Investors can choose from three different asset classes: equity (E type), government securities
(G Type) and credit risk-bearing debt or fixed income based investments (C Type). Investors can mix E, C and G type options according to their choice proportionately.
The only 80 C investment option that has the potential to give returns comparable to ELSS is NPS. But the biggest drawback is the different tax-treatment of ELSS and NPS. Also, 40% of the amount received at maturity has to be invested in annuities and the income generated from Annuities is taxable. Even the investment cap limit in equities is a huge turn off for young and
We hope the above analysis will help you choose the right tax saving instrument for you.