Retirement Planning for Senior Citizens| RetyrSmart



ELSS vs PPF vs Tax-saving FD: Which tax saving investment option is better?
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Inflation and taxes eat into our savings and consequently into the returns we make from our investments. While we have no control over inflation we can definitely look to utilising the tax breaks given by the government very well. This article takes you through 3 good investments that provide good tax savings too. Check out which works best for you. Team RetyrSmart

ELSS vs PPF vs Tax-saving FD: Which tax saving investment option is better?

With the cost of living going up, savings play a very important role for individuals and families. It is important that people save and invest more for their future as inflation eats away some of the savings and returns. Proper financial planning is extremely important for these savings to become meaningful investments and this why it is very important that one is not just saving but also investing in the right manner to ensure optimum returns.

Taxation reduces a substantial part of the income and in order to ensure maximum benefits from any investment, one must always look for tax-efficient investment instruments. Under Section 80C of the Income Tax Act, the government allows an exemption on investment in various schemes and individuals can claim tax deductions of up to Rs 1.5 lakh on such investments. Three such schemes are the Public Provident Fund (PPF), Bank Fixed Deposits (FD) and Equity Linked Savings Scheme (ELSS).

Tax Saving Fixed Deposit: Fixed deposits are risk-free financial instruments and tax-saver FDs also offer risk-free guaranteed returns. Because of FDs being risk-free, many Indian investors still prefer them over any other tax saving investment instrument. Tax saving fixed deposit schemes are offered by leading banks and financial companies. Contributions made towards these tax saving fixed deposits are exempt from income tax under the Section 80C.

Tax Saving Fixed Deposit Features:
a. It has a lock-in period of 5 years.
b. It can be claimed under section 80C for the tax rebate to the limit of Rs 1.5 lakh per year.
c. Tax saving FD accounts may be opened in the name of individuals or Hindu Undivided Families (HUF).
d. In case one opens a joint account, then only the first holder gets the tax deduction benefit.
e. The minimum investment amount is Rs 100 and maximum investment is capped at Rs 1.5 lakh per year in order to avail tax benefit.
f. The Interest rate of such FD remains the same as offered by the bank at the time of making the deposit.
g. The rate of interest is higher for Senior Citizens.
h: Premature withdrawal is not allowed.
i: One can not avail a loan against tax saver fixed deposits.
j: TDS is deducted as per the applicable tax slab on interest income earned.

Public Provident Fund (PPF): Public Provident Fund Scheme or PPF is a long-term investment instrument introduced by the government to encourage savings for providing security to people in old age. Any resident Indian citizen can open a PPF account. PPF account can be opened for minors also with either of the parents or a legal guardian jointly.

Public Provident Fund Features:
a. It is a risk-free long-term investment, backed by the government.
b. It has a mandatory lock-in period of 15 years and this can be extended indefinitely for blocks of 5 years maturity.
c. The minimum investment amount in a PPF account is Rs 500 per annum and the maximum amount that can be deposited in a year is Rs 1.5 lakh.
d. Under section 80C of the Income Tax Act, one can claim deduction up to Rs 1.5 lakh for the contribution made towards PPF.
e. It offers EEE tax benefits meaning the interest earned and amount received at the time of maturity is exempted from tax.
f. The current rate of interest on PPF is 8%. This interest is compounded on an annual basis.
g. Contribution to PPF can be lump sum deposit or in instalments provided a maximum of 12 such instalments are made in a year.
h. Partial withdrawal is permitted from the 6th year onwards and 100% amount can be withdrawn at maturity.
i. Only one PPF account can be opened in one name and there is no joint account facility.
j. Loans can be taken against the PPF amount.

Equity Linked Savings Scheme: Equity Linked Savings Scheme or ELSS is a type of mutual fund which offers tax exemption under section 80C of the Income Tax Act. These schemes invest the majority of their corpus in equities. Since the returns from such schemes are market-linked, the performance of these funds depends on the stock market and individual stock holdings in a particular ELSS.

Equity Linked Savings Scheme features:
a. It has a mandatory three year lock-in period.
b. ELSS investment is provided with 2 options - Growth and Dividend. Under the Growth option, the entire amount is withdrawn as a lump sum amount on maturity. Under the Dividend option, one gets tax-free dividends, even during the lock-in period.
c. There is no maximum amount cap in ELSS but, contributions made up to Rs 1.5 lakh only are exempted from tax.
d. On completion of the 3 year lock-in period, one can still continue to invest in the scheme.
e. Since these schemes linked to the market, they carry a higher risk than other investment instruments like PPF and tax-saver FD. However, the potential returns from these schemes are generally also much higher than the other two.

Tax-saver FD vs PPF vs ELSS

Tax-saver FD: Since bank FDs are risk-free, they are the safest investment option and ideal for very conservative investors. There are many other investment options which are risk-averse, but the tenure is comparatively longer. Depending on the bank, the returns on such FDs can range from 8% to 8.5%. The interest income is subject to TDS so, the effective rate of return is much lower.

PPF: PPF primarily meant for long-term financial goals. It is an ideal investment option for everyone investing for retirement. Once a PPF account is started a person has to continuously invest for 15 years every year, at least the minimum amount. The current rate of return in PPF is 8%.

ELSS: ELSS are meant for those investors who have a slightly higher risk appetite and are looking to invest to gain from the long-term higher returns offered by the markets. It is ideal for those who want to invest but do not wish to enter directly in the equity market. ELSS also offers a tax advantage on investment. The average return in case of ELSS schemes can be anywhere in the range 15-20 per cent, depending on investment tenure and market volatility. ..........