Nowadays, with the current inflation and rising cost of living, savings is necessary for anyone. Experts advised that at least 20% of your income should go towards savings.
Do not save what is left after spending, instead spend what is left after saving. ― Warren Buffett
But, everyone is aware of the fact but how many of us giving save money as a top priority? Major India’s working class is not planning for life after work. Only one in three salaried employees saves into a retirement fund.
Over 68% of working age people expect their family or the next generation to support them after retirement. However, the current statistics showing only 30% of such expectations are met in reality.
HSBC polled 1,045 individuals in India for this report, and 17,405 people from across 16 counties and territories. (source Livemint)
Saving must become a priority, not just a thought. Pay yourself first.― Dave Ramsey
So, start saving a percentage of your salary from the first paycheck. Also, proper financial planning is very crucial to provide these savings a worthy bucket of investment.
Let’s start to think, how to invest your hard-earned savings that turn your financial strength. As taxation reduces a substantial part of the income, must always look for tax-efficient investment instruments.
In this article, we will go through a comparative discussion of the three most popular and tax efficient investment options – ELSS, PPF, and FD. Certainly, this article will encourage you to invest according to your financial goals and risk-taking appetite.
What is Equity Linked Saving Scheme (ELSS)?
The Equity Linked Saving Scheme or ELSS is the most popular mutual fund scheme and invested primarily in the equity market. Therefore, the return from ELSS depends on the stock market and individual holdings in the scheme. Similarly, ELSS investment is a subject to the market risk.
Features of ELSS
- ELSS has a mandatory three year lock-in period, and allow to continue after that.
- ELSS provides two investment options – Growth and Dividend. In the Growth option, the entire amount is withdrawn after maturity. Whereas, you can get tax-free dividends, even during the lock-in period in the Dividend option.
- Investment in ELSS is eligible for tax exemption under section 80C.
- You can start ELSS investment with minimum Rs.500 through SIP (Systematic Investment Plan).
- The returns from an ELSS investment are treated as Long-Term Capital Gains (LTCG). So, that will be taxable at a concessional rate of 10% if gains are over and above Rs.1 lakh.
- Due to a market-linked instrument, ELSS has the potential of giving returns of 11%-15%. So, higher risks and higher revenues.
Read also:Planning for New Financial Year 2019-20
What is the Public Provident Fund (PPF)?
Public Provident Fund or PPF is another favorite investment instrument among Indians for ages. PPF is a long-term Central Government scheme. So, PPF is not market driven and comes with zero risks.
Features of PPF
- The PPF has a lock-in period of 15 years. Also, you can extend the tenure after maturity.
- You can start PPF investment with minimum Rs.500 and maximum you can deposit Rs.1.5 lakh per year.
- PPF is eligible for tax deductions under section 80C of up to Rs.1.5 lakh.
- The PPF rate of interest for April – June 2019 (Q1 FY 2019-2020) is 8%. Also, PPF interest is compounded on an annual basis.
- Premature or partial withdrawals are allowed after the 5th years of investment.
- Loans also can be taken against the PPF account.
- Any a resident Indian citizen is eligible for PPF. Even, PPF account can be opened for minors with either of the parents or a legal guardian jointly.
What are Fixed Deposits (FD)?
Fixed Deposits or FDs are the most peaceful saving instrument. FDs are the perfect savings option for those people who are not ready to take any risk but want to invest with assured returns.
Tax-saving FDs are offered by all the public banks, private banks, small finance banks, and the Indian Post Offices. Most importantly, FDs with 5 years lock-in period are mostly counted as a tax-saving instrument under Section 80C of the Income Tax Act.
Features of Tax Saving Fixed Deposit
- Lock-in period of 5 years.
- You can start investing in tax-saving FDs with minimum Rs.100; however, it varies from bank to bank.
- It can be claimed under section 80C for the tax exemption to the limit of Rs.1.5 lakh per year.
- Tax-saving FDs offer an interest of around 6.50%-8.25% p.a. Also, this interest rate is 0.25%-0.50% higher for senior citizens (aged 60 years and above) generally by around.
- Premature or partial withdrawals for tax-saving FDs are not permitted before maturity.
- In case of Joint FD, only the primary account holder is eligible for the income tax related benefits.
- Tax-saving FDs do not provide loan facility.
- TDS is deducted as per your tax slab on interest income earned from these accounts.
ELSS vs. PPF vs. FD
|1||Eligibility to Invest||Any Individual Taxpayer including NRI’s||Any Resident of India||Any Individual Taxpayer including NRI’s|
|2||Lock-in Period||3 years||15 years||5 years|
|3||Minimum and Maximum Investment Amount||Rs.500 to No Limit||Rs.500 to Rs.1,50,000||Rs.100 to Rs.1,50,000|
|4||Tax-efficiency||10% LTCG tax applicable on the gains over and above 1 lakhs||Tax Free||According to your tax slab, TDS applicable|
|5||Expected Returns||10% -15% returns in the last 5 years. But, not fixed and subject to equity market risks.||8%||6% – 7.5%. But, it varies for different bank.|
|6||Tax Benefit||Rs. 1.5 lakhs u/s 80C||Rs. 1.5 lakhs u/s 80C||Rs. 1.5 lakhs u/s 80C|
|7||Investment Option||Medium to Long term||Long term||Medium to Long term|
|8||Withdrawal||Not Allowed||Allowed||Not Allowed|
|9||Risk||Risk Involved. But has delivered good returns.||Risk Free||Risk Free|
|10||Loan Facility||Partial loan offered after 3 years lock-in period||After 3 years of investment||Not available|
|11||Online Option||You can start online as a lump sum or SIP||Not all banks offer online facility to open an PPF account||Most of the banks offer online facility to open FD account|
Read also:Capital Gain Tax – STCG & LTCG
Should You Invest in ELSS or PPF or Tax saving FDs?
No doubt all are a very popular investment option. Where PPF or FD is a very safe product and gives assured returns, there returns from ELSS depend on the performance of the stock markets and volatile in nature.
But, before starting any investment, you must consider these primary factors – age, investment horizon, future needs, and risk appetite.
So, if you are long term investors with higher risk appetite, then ELSS is the most suitable option for you. Whereas, PPF can be opted by those who can tolerate moderate risk. Similarly, someone nearing retirement may invest in tax saving FDs, due to the low risks, and guaranteed returns.
In conclusion, you must always choose an investment option based on your financial goals and risk-taking capability rather than randomly.
An investment in knowledge pays the best interest. – Benjamin Franklin
So, when it comes to investing, nothing important more than educating yourself. Therefore, do the necessary research, analysis, and study before making any investment decisions.
Hence, after considering these three investment instruments, you can understand that there is no right or wrong option. Almost, we have compared all the eligibility criterion, lock-in period, tax status, risk factors, etc. of ELSS, PPF, and FD.
So, invest your hard earned money with the proper goal-based approach. Only that can lead you sensible portfolio management and wealth creation.
Hope, this article will be helpful for you. If you have any inquiries regarding the above post, please feel free to comment. Also, you can directly email your suggestion or queries.