ELSS, PPF, NPS, ULIP: which is the best option to save taxes under Section 80C? : 06-03-2020

You hardly have a few weeks to finish your tax-saving investments to claim tax deductions for this financial year. If you are still looking for the best investment, you are unlikely to finalise your investments before March 31, the deadline to make investments. Instead, try to find the best investment option that matches your investment objective and risk profile.

Confused? ETMutualFunds.com has compiled the features of these investment options – both the qualitative and quantitative data – that would help you to compare and find the best tax-saving option for you.

We will begin with the return possibility or the likely return these schemes may offer you.

We tried to find out how much a monthly investment of Rs 10,000 for 15 years had created at the end of the investment period.

Let’s begin with PPF, which has a lock in of 15 years. An investor who had invested Rs 18 lakh in the last fifteen years (Rs 10,000 monthly) would have made Rs 34.16 lakh at the end of 15 years. We have used the previous interest rates available on the public domain for the calculation.

An ELSS would have made a corpus of Rs 53.63 lakh in the same period. We have taken ABSL Tax Relief 96 Fund for our calculation as this fund is one of the oldest schemes and has remained one of the favourites of investors.

Next, the fourth generation ULIP. Data available with policybazaar, an insurance aggregator, shows that ULIPs will be able to generate a corpus of Rs 28.3-39.8 lakh based on the past five-year performance. The corpus would be Rs 28.4- Rs 55 lakh based on the past seven-year performance.

Our third option, NPS or National Pension System to save taxes under Section 80C, will create a corpus of around Rs 42 lakh after 15 years on a monthly investment of Rs 10,000. We assumed 10% rate of return on investment.

An explanation before we proceed. While we have tried to do a comparison with real numbers, we had to make rate of return assumptions for NPS and ULIPs. NPS is a comparatively new investment product. ULIPs have also been revamped several times in the past, the recent one being in 2017, to make them more transparent and customer friendly. It wasn’t feasible, or it did not make sense to get their past performance

Looking at the corpus generated at the end of the investment term, it is evident that ELSS or tax saving mutual funds and Unit linked Insurance Plans (ULIPs) emerged as the clear winners. But hold your horses.

Investment experts would tell you more about why you should never choose an investment option based on its current or previous performance or the return potential. You should always choose an option that matches your investment objective and risk profile.

“Do not focus on returns. Your investments towards Section 80C should be governed by the risk you are willing to take while investing to save taxes under Section 80C,” says Saurabh Mittal, founding partner, Circle Wealth Advisors. “All the four products cater to different needs and suit different risk profile investors,” he adds.

PPF is a great product for those investors who want capital protection and are ready to lock in their money for a long period of 15 years. Also, it can be a part of your Section 80C investment which can be redeemed for your retirement care after the lock in is over. It enjoys EEE taxation status.

ELSS is a great product for those who want exposure to equities and are ready to take the extra risk of investing in stocks. It also comes with the shortest lock-in period of three years. However, unlike PPF returns from ELSS is taxed 10% — on long term capital gains of over Rs 1 lakh.

ULIPs are good for those with moderate risk profile who can manage their allocation between equity and debt in a single tax saving product without paying switching charges unlike mutual funds. ULIPs also score in terms of taxation.

However, it has some disadvantages. One, mixing of insurance and investment needs may not be a smart idea. If you are banking on the insurance cover, it is not wise to get out of the scheme if it performs badly for a long period. Also, if an investor already has a sufficient term insurance cover, she will be paying the mortality charges (or for life insurance cover) in ULIP as well as it is designed as an insurance cum investment product.

NPS, the low-cost option to save taxes under Section 80C, is good for an investor with a moderate risk profile. NPS does not invest 100% in equities, it can only invest maximum up to 75% of the corpus in equities – that too, in index schemes. However, the corpus is locked till retirement or 60 years. If a person wants to gets out before 60, she should compulsorily use 80% of the corpus to buy an annuity.

“You cannot take 100% equity exposure through NPS, even if the investor is young and has a very long investment horizon. This could be an opportunity loss for an investor with a high risk profile,” says Mittal.

Another drawback of investing in NPS is about uncertainty over the future annuity rates. Going back to our example, where the investor accumulated Rs 42 lakh at the time retirement, going by the current rules, she would be allowed to take out around Rs 25 lakh in lumpsum. For the remaining 40%, she will have to necessarily buy annuity. Now, given the current annuity rates between 6% and 8% she would then, (after 15 years), get around Rs 9,700 as monthly pension.

Thus NPS overlooks that with time, the value of money erodes. The liquidity after the maturity could be a concern for investors. Also, you cannot be sure of annuity rates.

Finally, choose a tax-saving option based on your need and risk appetite, and not the returns. Compare the options, then finalise your investments to claim the Section 80C benefits.

Source : PTI