Come December and everyone will appear to have come out of hibernation instigated by the wakeup call received from the office to submit tax saving investment proof
In view of the shortage of time and patience most of us tend to take sub-optimal investment decisions and often end up parking our money in schemes, which are not suitable for us and moreover play no role to serve our long term financial goals.
In India we have many tax saving instruments available with Public Provident Fund (PPF), National Pension Scheme (NPS) and Equity Linked Saving Scheme (ELSS) being most popular. So let’s make a comparison on its basic parameters to help find the best option for us
| Investments | PPF | NPS | ELSS |
| Tenure/ Lock in Period | 15 | 10 | 3 |
| Min. Amount (INR)/Annum | 500 | 6000 | 500 |
| Max Investment/Annum | 1.50 lac | No cap | No Cap |
| Rate of Return | Guaranteed returns | No guaranteed returned depends on market since equity exposure allowed up to 50% | |
| Tax Benefit | Max INR1.50 lac Under 80C in FY | Max INR1.5 lac under 80c and RS 0.50 lac under 80CCD(1b) in a FY | Max INR1.50 lac Under 80C in FY |
| Asset Allocation | 100% allocation in Government Bonds/TB/Fixed income instruments | Max 50% exposure in equity allowed depending upon portfolio chosen | 100% in equity |
| Withdrawals | Partial withdrawal allowed from 7th year. Complete at the time of maturity | At the age of 60 years 60% can be withdrawn and min 40% to be used to purchase annuity. | Withdrawal only after maturity i.e. 3 years from the date of investment. |
| Tax Implication | Tax Free (EEE) | Only 60% is taxable in case withdrawn | Returns are tax free (EEE) no capital gain |
| Associated Risk | Completely safe backed by Govt. | Risk depends on the portfolio chosen | Risky since 100% exposure is in equity. |
So which of those options should be our preferred choice: well it totally depends on individuals risk profile and long term objectives. However one has to understand that no investment is risk free. Equity has market risk and Debt has shortfall and inflation risk, so one has to decide on the kind of risk one can afford to take.
To make things more clear in view of the nature of the investments we can assume that;
- Youngsters should go ELSS way since they have high risk appetite and time is on their side to overcome the market volatility. ELSS has much better ratio of wealth creation over a longer duration. Aggressive Investors who are okay with market risk can also go with this option.
- Investors who are growth oriented should go for NPS since it has the fexibilty to change the portfolio and balance between market risk and inflation risk.
- Investors who are conservative and also those who have no PPF account and have 15 to 20 years to retirement should open an account since it is government backed scheme thus has principal protection. However, there is an inflation risk since the interest rates have been falling over past years and are liable to change every quarter now.
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