Which is the best tax saving option? PPF NPS ELSS

Tax season is going on and you want to finalize your investments to save tax. Investment decisions are based on three important consideration viz. Return, risk, and liquidity. Saving taxes can also be included in the return. Out of three only first two qualify for tax deduction under Section 80C and 80 CCD of Income tax act. Investment in PPF will give you an upfront tax deduction up to ₹150,000 and depend upon which slab you are taxable you will get the benefit of ₹15000/ ₹30000 or ₹45000 in taxes. Assuming you are in highest tax slab and assuming you are not doing any other Section 80C deduction qualifying investment your net investment will be ₹150000. You get 8% return on 1.5 lakhs amounting to ₹12000 that takes your yield to 12% including tax benefits. Dual benefit interest earning plus tax saving.

The downside to this investment is, PPF investment is illiquid and if you have opened a new account you cannot withdraw it before 15 years. Secondly, interest rates in PPF accounts are now reset quarterly. So, in a downward interest rate scenario, you will lose interest on even old accumulated investments. This is a big negative with PPF now which was not there until last year. So my suggestion is, instead of deposit in PPF account go for higher deduction of Provident Fund with your employer (Voluntary Provident Fund – VPF). This will give you the benefit of section 80C deduction and also give you a higher return than PPF. Last year PPF return was 8.1% while PF fetched a return of 8.8%.

This year too PPF return is 8% while PF return will be around 8.65%. EPF is somewhat flexible as compare to PPF as if you change your job, you have an option to carry forward your EPF account or can withdraw the whole amount which is tax-free if your tenure is minimum five years. So for tax purpose, I would suggest you opt for EPF and VPF. Traditionally post office and few govt. banks are opening PPF account where you don’t get online services like deposition, balance check etc. nowadays some banks have started providing online facilities for accessing PPF account.

Coming to NPS – It’s not great scheme as per me. It’s just deferment of tax and only arbitrage you do is interest on tax deferment. If you are not too keen on tax planning, I believe this is a poor scheme. There are other multiple products which are much better. Liquidity is zero, you can withdraw only 40% of the total corpus and that too after 60 years of age. For remaining 60% you have to buy an annuity which will be taxable.

Last but not least Is it better to invest in ELSS. Yes, given that you have a long-term horizon of minimum 5 years. ELSS is like any other equity investment and carries the underlying risk of equity. ELSS has a locking period of three years hence fund manager has a good long time horizon to invest your money at least for 3 years. (Actual average holding period is much higher at approx 5 years). ELSS investments are exempt from Income tax under section 80(C). Capital gains from ELSS are also exempt from income tax. ELSS can be started with as low as Rs. 500.

I would suggest, in case you are looking for only tax saving, go for VPF first then PPF and finally ELSS.

Leave a Reply