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ULIP Or ELSS? NPS Or PPF? Top Tax-Saving Dilemmas To Avoid In FY19-20

Adhil Shetty


An effective tax-saving strategy helps you not just in minimising your tax burden but also allows you to optimise investment returns, manage liquidity, and minimise risks. There are several types of tax-saving products available in the market, but every instrument may not suit every taxpayer. Tax-saving should be closely linked to the financial goals of the taxpayer; so depending on the age, risk appetite, and goals of the individual, the appropriate tax-saving instrument should be selected. For example, a tax-saving product that suits a young assessee may not suit a retiree, and vice-versa. So while selecting the appropriate tax-saving products, the assessee often faces the dilemma of which product to choose and why. It can get more confusing when two tax-saving products have similar benefits or belong to the same asset category. As FY19-20 draws to a close, let’s find out some of the tax-saving dilemmas to avoid.

ULIP vs. ELSS

Many people confuse between Unit Linked Plans (ULIP) and Equity Linked Savings Schemes (ELSS) because both the products offer tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. But the similarities end here. A ULIP is an insurance-cum-investment product whereas ELSS is a pure investment product. ULIPs usually carry higher charges than ELSS. The minimum lock-in periods in ULIPs and ELSS are 5 years and 3 years, respectively. ULIPs require a long-term commitment, i.e., once you have started investing in it, you have to invest in it every year; on the other hand, you can invest a one-time lump-sum amount or start a monthly Systematic Investment Plan (SIP) for the desired tenure in ELSS. ULIPs offer the opportunity to invest in both equity and debt assets whereas ELSS allows investments only in the equity class.

So, if you are looking for an insurance plus investment product and you are ready for a long-term commitment, you can opt for ULIP, but if you are looking for a pure investment product with high risk and return prospect, ELSS could be a good choice for you.

NPS vs. PPF

Both the National Pension System (NPS) and the Public Provident Fund (PPF) are long-term investment products but offer different types of benefits to their investors. NPS is a product that focuses on retirement planning. The NPS fund matures when the investor reaches superannuation age, and at the time of retirement, 60% of the fund received is tax-free while the remaining 40% is required to be invested to purchase an annuity plan. The annuity income is later taxed as per the slab rate applicable to the beneficiary in the year of the receipts. So, the NPS income is not entirely tax-free.

On the other hand, PPF offers EEE benefit, i.e., investment up to Rs 1.5 lakh under Section 80C, the maturity amount and the interest earned on such investments are all tax-exempted. The interest on PPF investments is revised every quarter and there is a lock-in period of 15 years.

NPS, on the other hand, offers an additional tax benefit of up to Rs. 50,000 under Section 80CCD, so if you are looking for extra tax benefit over and above the 80C threshold, you can go for it. However, if you are not looking for a pension product, require a safe return, and are ready to wait for a long lock-in period, PPF is a very attractive tax-saving investment that you may not want to miss out.

NSC vs. Tax-saving FD

If you are looking for a tax-saving product that offers secured returns with a minimum lock-in tenure, you can explore benefits available under National Savings Certificate (NSC) and the 5-year tax-saving fixed deposits. NSC and 5-year tax-saving FDs both come with a lock-in requirement of 5 years. You can claim tax benefit under Section 80C by investing in NSC or a tax-saving FD. The interest rate on NSC is revised by the government every quarter, whereas the interest rate on tax-saving FDs is decided by banks factoring in various economic factors. Currently, the interest rate offered under NSC is 7.9%, whereas in tax-saving FDs the interest rates are in the range of 6.7% to 7% p.a. Investments in NSC are not subject to a TDS whereas bank FDs are subject to TDS. Investment in the NSC can be used as a pledge to raise loans, but tax-saving FDs are not allowed to be used as collateral for a loan.

So, while finalising your last-minute tax-saving moves, don’t hesitate to consult your financial advisor if you’re unable to decide which product is better suited for you. It’s better to do your due diligence before investing in a tax-saving product, because later you may need to wait for the lock-in periods to get over for the return of your money.

Lastly, from FY20-21 taxpayers will have the option to continue with the existing tax system or choose a new tax regime with discounted slab rates which they can benefit from if they’re willing to forgo a majority of current tax-deduction benefits. This optional tax system was proposed by Finance Minister Nirmala Sitharaman in her Budget2020 speech. As a taxpayer, you’ll be well-advised to calculate your tax-saving measures from next year and go for the system which lowers your tax outgo. That being said, if you decide to go for the new system, ensure you do not discontinue your investments and essential insurance purchases just because there are no tax incentives attached to them. In fact, the new system should give more freedom to invest and insure according to your financial goals and responsibilities.

The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.