Strategy by CA Manish P Hingar, Founder at Fintoo
ELSS, PPF and ULIP all three investment options provide benefits under Section 80C upto ₹1.5 Lakhs p.a along with generating good returns for the investors. But deciding which option is best in terms of tax benefits and investment returns among these three depends upon certain factors which are:
1. Liquidity: ELSS offers the shortest lock-in period of only 3 years as compared to ULIP and PPF which have lock-in periods of 5 years and 15 years respectively. It is further suggested to consider liquidity before making an investment in any of the tax-saving investment options.
2. Expenses: ELSS offers the benefit of low costs and professional management as SEBI has capped limits on the expense ratio while there is no such limit for ULIPs. The charges for ULIP schemes can go much higher than mutual funds. For PPF, the investor just has to pay a one-time charge of ₹100 over and above their investment amount.
3. Risk Cover: ULIPs come with an in-built insurance plan that offers the sum assured to the family in case the policyholder dies within the term of the policy. While, in the case of mutual funds and PPF, there is no risk covered by way of insurance.
4. Return on Investment: The returns on PPF are fixed, guaranteed and exempt from tax while in the case of ELSS and ULIP returns are not guaranteed as both investment options are market linked. The current rate of interest in PPF is 7.1% pa. The average return on ELSS for 3 years and 5 years is 17.19% and 11.10% respectively.
5. Taxation: Proceed from PPF if held till maturity is exempt from tax while in case of ELSS gains after the lock-in period if withdrawn are taxed at 10% with an exemption of ₹1 lakh. On the other hand in case of ULIPs, the maturity amount remains tax free only if the aggregate annual premium is up to ₹2.5 lakh a year and if the annual premium goes above ₹2.5 lakh then one has to pay capital gains tax on any income earned on it at the rate of 10% if held for more than one year and at 15% if held for less than one year.
It is suggested to invest in a mix of both PPF and ELSS and spread your investment across medium to long tenure. Additionally, you should have a term plan with adequate risk cover which should be at least 10-15 times of your annual income.
When considering which investment option is right for you, it is important to consider your financial goals, risk tolerance, and time horizon. It is generally a good idea to diversify your investments across multiple asset classes in order to manage risk. It is also advisable to consult a financial advisor or professional before making any investment decisions.
Strategy by Nitin Rao,Head Products and Proposition, Epsilon Money Mart
When it comes to ELSS, PPF and ULIP, it is a necessity to understand the asset classes they come into; while ELSS falls into equity, PPF falls into debt and ULIP is a blended insurance product offering protection as well as an investment option. Either of these can be used to claim deductions up to Rs. 1,50,000 under section 80C of the Income Tax Act. Let’s compare them as per their specifications:
1. Lock-in period: ELSS- 3 Years; PPF- 15 Years (partial withdrawal allowed after 7 years); ULIP- 5 Years.
2. Taxation: ELSS- 10% if returns exceed Rs. 1,00,000 in any financial year, no indexation benefits; PPF- Tax fee; ULIP- returns exempted u/s 10(10D).
3. Risk: ELSS- Equity linked; PPF- Government backed, most secure; ULIP- depends on composition between equity/debt/hybrid.
4. Returns: ELSS- Dynamic (10-14% in long term); PPF- 7.1% currently (changes every year), ULIP- dynamic (depending on the composition of equity/debt/hybrid). However, past performance may or may not be achieved in the future
Investment in either of the options depends on the current objective and future goals. When we are looking for liquidity and relatively better returns (subject to market returns) ELSS is the option, but PPF and ULIP can be an option when looking for plain tax saving. Thus, diversifying is the best option. Investors can divide their sum between two options.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
