I am 28 years old and a working professional and want to invest Rs. 1 lakh in a year for tax-saving purposes. I am confused whether I should invest in ELSS or National Savings Certificate (NSC). I don’t need this money for the next 10 years. My aim is to save tax and maximize returns.
Various products are eligible to avail tax benefits under section 80C. These range from insurance products to tax-saving fixed deposits of banks to tax-saving fixed deposits. ELSS e.t.c. The suitability of a particular investment product will depend on various factors such as your risk appetite, the time frame available and the fund requirement in the near future.
Since the NSC which currently offers you a fixed annual interest of 6.80% for the next 5 years, there is no scope to maximize your returns as against the return of 14.91% given by ELSS as a category. And as your time horizon is around 10 years, in my opinion, Equity Linked Savings Scheme popularly known as ELSS is a suitable product for you. ELSS funds are basically equity funds and thus are riskier in the short run but have the potential to give you better returns in the long run as compared to NSCs. ELSS plans have a lock-in period of only 3 years, but you definitely cannot get better returns within 3 years of lock-in. The value of your investment in these ELSS is also likely to be less than your investment cost during this lock-in. period of three years.
So technically you can redeem your investment within three years, but if the market is not in a good position after the completion of three years of your investment then you may have to continue investing in ELSS for more than three years. If you are investing in ELSS funds or any equity scheme of mutual funds for that matter, you should have a minimum time horizon of 7 years. Since, you are young; You can take higher risk of equity exposure by investing in ELSS funds. But, if your tenure is less than 7 years, then you should consider investing in NSC or Tax Saving Bank FD so that the tax saving is u/s 80C. Since there is not much time available for the year but from next year onwards I would suggest you go for Systematic Investment Plan (SIP) route to invest in ELSS so that your investment is spread throughout the year and you can avoid volatility risk associated with equity investments. help.
Balwant Jain is a tax and investment specialist and can be contacted on Twitter at jainbalwant@gmail.com and @jainbalwant.
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