If your goal is to save taxes, then opportunities like ELSS and PPF are great. But if you want to save specifically for your retirement then ULIP is a great option that also provides tax-benefits under EEE. However, it is important to find the right investment opportunity for yourself given your current income and future goals.
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Here’s a comparative analysis of ELSS vs PPF vs ULIP to save taxes and generate income.
Equity-Linked Saving Scheme: ELSS
ELSS is a great option for those who want to invest their money in mutual funds and save taxes. ELSS is a diversified, equity mutual fund that is managed by experienced finance professionals. It invests in the capital market and selects companies with different market capitalisations.
What is the risk involved?
As it is an equity fund, the investments are subject to market risks.
What are the returns?
As it is market-linked, the returns would vary depending on the scheme selected. An investor can get 12-14 percent return (per annum) approximately.
What are the tax benefits?
It is the only mutual funds class eligible for tax deductions. Tax deduction of up to Rs 150,000 is available in a financial year under Section 80C.
However, there is a 10 percent LTCG tax applicable if the returns are over and above Rs 1 lakh after a holding period of one year.
What is the lock-in period?
There is lock-in period of three years. No possibility of premature withdrawal is available.
Is there a time limit for the investment?
There are no upper time limits.
How much can you invest?
There is no upper limit to the amount of investment; tax deduction, however, is capped at Rs 150,000.
How does liquidity work?
Funds will be available only after the lock-in period of three years.
Public Provident Fund
PPF was introduced by the government to encourage people to save and make provisions for retirement/old age. The scheme is available for all resident citizens of India.
Only one PPF account for an individual is allowed (including joint accounts). In case of the demise of the holder the account is passed on to the nominee or the legal heir. Contributions to PPF account can be made either in 12 instalments or a lump sum annually.
What is the risk involved?
Being a government initiative, PPF investments are safe.
What are the returns?
The interest rate for PPF accounts is declared by the government each year. Currently, the rate is 7.1 percent per annum.
What are the tax benefits?
The amount is exempt (EEE) from taxes at the time of investment, accumulation, and withdrawal. Deductions up to Rs 150,000 a year can be claimed under Section 80C of the Income Tax Act, for the contributions made towards PPF. The interest received on the amount at the time of maturity is also entirely tax-free.
Lock-in period
A lock in period of 15 years is imposed.
Is there a time limit for investment?
Investments can’t be made for more than 15 years. However, it can be extended for a further five years.
How much can you invest?
The minimum contribution is Rs 500 and maximum contribution is Rs 150,000 in a financial year.
What about liquidity?
Partial withdrawals are allowed post the fifth year of the policy with basic conditions met.
Unit-Linked Insurance Plan
ULIP is a combination of investment plus insurance product. In ULIP, one part of the investment is used for insuring the investor, while the other part is invested in the financial products of their choice. Options to invest in equity, debt, hybrid, or money market funds are available through ULIPs. This sets ULIPs apart from the other investment policies.
Initially, the premium of the ULIP payment goes towards insurance needs and policy expenses. Once these deductions are made, the premium is divided between providing a life cover and buying fund units for investment.
What is the risk involved?
ULIP investment is not as diversified, compared to ELSS. The risk in ULIP is probably a bit higher than ELSS.
What is the lock-in period?
There is a lock-in of five years. However, an investor can switch from equity to debt or hybrid as per their investment objective anytime during the lifecycle of the investment.
What are the returns?
The returns can vary depending on the combination of equity, debt, hybrid funds in the investment.
What are the tax benefits?
The invested amount qualifies for a tax deduction of up to Rs 150,000 under Section 80C. However, the gains are taxable.
What are the charges applicable?
There are complex and multiple charges like policy administration charges, premium allocation charges, mortality charges, etc, applicable.
What about liquidity?
Funds can be available after the lock-in period of five years depending on further policy conditions.
