What are the differences between ELSS, PPF, NSC, and Bank FDs regarding tax-saving benefits under Section 80C?
The Income Tax Act allows individuals to save taxes by investing in specific financial instruments under Section 80C. You can save up to ₹1.5 lakh every year through options like the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and Fixed Deposit (FD). Here’s a breakdown of three popular choices for saving taxes: ELSS, PPF, and Tax-Saving FDs.
What are ELSS, PPF, and FD?
- ELSS (Equity Linked Savings Scheme) is a type of mutual fund that helps you save taxes.Since it is market-linked, it carries some risk but can also provide higher returns. You can invest with as little as ₹500, and the money remains locked in for three years.
- PPF (Public Provident Fund) is a government-backed savings scheme with zero risk. You can invest a minimum of ₹500 and enjoy tax-free interest. The money is locked for 15 years, but you can make partial withdrawals after 6 years.
- Tax-Saving Fixed Deposit (FD) is a safe investment where you deposit your money for five years and get guaranteed returns. You can invest as little as ₹100, but the interest is taxable.
Key Differences Between ELSS, PPF, and FD
| Feature | ELSS | PPF | NSC | Bank FDs |
| Lock-in Period | 3 years | 15 years | 5 years | Varies (usually 1 – 10 years) |
| Returns | 10% – 11% (market-linked) | 7.1% (01.04.20 – 31.03.25) |
7.7% (01-04-23 – 31-03-25) |
6-8.5% |
| Risk Level | Moderate to High (market-linked) |
Low | Safe | Safe |
| Premature Withdrawal | Not Allowed | Allowed after 6 years | Not Allowed | Not Allowed |
| Taxation | 12.5% on Long-Term Gains (LTCG) | Tax-free Interest | Taxable as per income slab |
Taxable as per income slab |
ELSS: High Returns, High Risk
An ELSS is the only mutual fund that qualifies for tax savings under Section 80C. It has a lock-in period of just 3 years, the shortest among tax-saving options. Historically, ELSS returns have been between 11% and 13%, but since it is market-linked, returns can vary. After the lock-in, you can stay invested or withdraw your money.
PPF: Safe and Steady
PPF offers guaranteed returns and is risk-free because the government backs it. It has a long lock-in period of 15 years, but you can make partial withdrawals after 6 years. The current interest rate is 7.1% (From 01.04.20 to 31.03.25) and the returns are tax-free. PPF is ideal for conservative investors looking for long-term security.
Tax-Saving FD: Stable, Low-Risk
Tax-saving FDs offer assured returns, but their interest is taxable. These deposits have a 5-year lock-in period and are low-risk. However, you cannot withdraw the money early; no loan facility is available against them.
Choosing Between ELSS and PPF
ELSS is better if you’re looking for higher returns and can tolerate some risk. It has a shorter lock-in period and the potential for high growth. However, if you prefer security and stable, tax-free returns, PPF might be more suitable.
In conclusion, both ELSS and PPF offer tax-saving benefits but cater to different types of investors. When choosing between them, consider your risk tolerance, investment horizon, and financial goals.
The right investment depends on age, risk appetite, and financial goals. A mutual fund distributor can guide you in selecting the best option, ensuring you save tax and grow your wealth effectively. Investing wisely is more manageable with expert help!
