ELSS or PPF – What’s the best tax saving wealth generator?

With less than seven days left to make those investment decisions that will help save tax this financial year, Pankaj Bansal, chief business development officer, Bank Bazaar says that rushing into last minute investments could led you into making money mistakes. “When we rush to save tax in the month of March, we tend to take products which don’t give great returns. Some of the investments we make may not be ideal,” he told Money9.

Bansal says don’t wait till the year financial year end. It is better to start investments in April so that they compound over the full financial year. But if you must invest in March, he says, look at investments basis your needs.

Life Insurance

“If you don’t have a life insurance for you or your family, take that first. You Look at all your liabilities and how much money your family will needs over the next 15-20 years while choosing insurance coverage. Be mindful since these are long term products and you keep paying premium on that amount over the years,” he said.

Provident Funds – EPF & PPF

Bansal says insurance, while it gives you tax incentives, should not be treated as an investment but as a security. From an investment perspective, he suggests Equity Linked Saving Schemes (ELSS) and provident funds (EPF and PPF) as better instruments.

EPF consists of employers’ and employees’ contributions, where employees can invest as much as 10% of the basic salary in EPF. This year in the Union Budget, the Finance Minister capped the EPF contribution to 2.5 lacs per annum for tax benefits.

The Public Provident Fund (PPF) on the other hand, has an annual limit of 1.5 lakh that may be deposited by an investor. It gives an annual yield of 7-8% but is a long term option for investors as the lock in period is 15 years.

ELSS

In ELSS, however, the lock in is just three years and the investment in such funds is tax exempt up to a limit of 1.5 lakh under Section 80C. “The good news is that from data of the last 20 years, ELSS schemes have been giving 12-13% returns. The tax rate is also just the 10% Long Term Capital Gains tax since the holding period is three years. It is a viable and a good option for saving tax and making money grow,” said Bansal.

While returns on ELSS have been at par with equity mutual funds, the fact that there is only LTCG applicable means the proceeds from dividends are not added to an assessee’s income.

Tax-Saving Fixed Deposits

Then there are the five-year ‘tax-saving’ fixed deposits. Here, while the interest earned after maturity will be added to an investor’s income, the principal invested in a particular financial year gets tax benefit again to the maximum limit of Section 80C.

“FD rates are not that great. The repo rate hovering between 5-6% is not very aggressive. I would rather invest in ELSS than in a Fixed Deposit where my lock in also 3 years versus 5 years,” Bansal said.