There are different wealth creation and tax saving options available for retail investor in India like PF, PPF, life insurance plans, ELSS, ULIPs and many more. A sensible investor will always invest in an option that gives him overall benefit of appreciation of value, protection of wealth, savings of tax and strategic flexibility. This blog intends to present an opinion on ELSS vs PPF vs ULIP.
When it comes to tax saving people are always looking only to save only tax, however tax saving instrument can be an effective wealth generation tool as well. Generally salaried employees tend to invest late in the month of March when the financial year comes to an end and that too under intense pressure as there is mostly a case that they invest in something that only save tax without thinking of letting that money grow which is invested in such tax saving instrument.
Equity Link Savings Scheme (ELSS)
Equity link schemes are mutual fund schemes that qualify for tax saving investment under the limit of Rs.1.5 Lakh under section 80 C of Income tax and is considered as one of the best way to utilise their investment limit by not only saving tax but also through achieving their financial goals.
ELSS mutual funds scheme mostly invest 65% in equity related instruments. ELSS comes with 3 year lock in period and its returns are tax free. So while investing in it; one will not only save tax but its returns are also tax free. Hence it is considered as one of the best way of saving tax with achieving financial goals. The returns in ELSS are substantially higher as compared to PPF or ULIP.
Both ELSS and PPF are tax saving options available to investor but the major difference in it is lock-in period. The lock in period in PPF is 15 years while in ELSS it is 3 yeras. As far as returns are concerned, in PPF the interest rate set in the Union Budget 2016 for FY 2016-17 is 8.1%. On the other side since ELSS invest 65% in equity related instruments, the returns are more than just 8%.
ELSS has its own drawback like one cannot have premature withdrawal, if you are investing in first time then lot of documentation is to be done. It is very difficult to make wise investment decision as there are so many funds available to invest under ELSS. However, the returns are higher as compared to ULIP and PPF and this can be suited for those investors who wants to take a little risk and want to have less tenure of investment.
Public Provident Fund(PPF)
Public Provident Fund was introduced in 1968 to encourage savings among Indians. It is considered as the most preferred and safest investment avenue among Indian nationals. One can open PPF account by as low as Rs.100 every year. PPF account can be open with designated post office or with bank branch. Now some of the banks offering online facility to open PPF account. One can freely transfer its PPF account held in post office to bank and from bank to post office. The tenure of investment is 15 years which can be extended in block of 5 years. Even minor can open PPF account. The minimum amount one has to invest every year is Rs.500 and maximum can be Rs.1.5 Lakh. The interest rate is declared by Central Government annually, there is compounding of interest which is earned in PPF account. The interest rate for FY 2016-17 declared is 8.1%. The amount deposited in PPF account qualify for tax saving under section 80C. On maturity of PPF account, the interest is tax free. It is possible that PPF account holder can opt for partial withdrawal every year starting from year 7 of opening such account. One can also avail loan against PPF amount lying his/her account starting from Year 3 to Year 6.
Investment in PPF account is an ideal option for planning retirement corpus. Although it has lock-in period of 15 years which makes it less lucrative. This form of investment can be suited for those investors who is looking for long term investment with tax free returns and who does not want to take any risk of investing it into stock market.
Unit Linked Insurance Plans
ULIPs are nothing but a plan that is mix of insurance benefit and investment benefit. Mutual funds like ELSS offers wealth creation but life protection cover is missing. Other conservative options like PF or PPF also offer wealth creation but once again life protection is missing and also it can hardly generate real return that can be match with inflation over long term.
ULIP can be used as plug in between wealth creation and life protection over. From ULIP premium, small amount goes to secure life insurance cover and rest of the money invested in funds just like mutual funds. Deduction is allowed under section 80C towards amount of premium paid for respective financial year. One has to note that to claim deduction under section 80C, the premium paid for ULIP has to be less than 10% of sum assured amount of ULIP. Say for example, ULIP premium paid is Rs.2 Lakh and the sum assured amount of ULIP is Rs.15 Lakh then only Rs.1.5 Lakh is allowed as deduction (10% of sum assured).
Just like ELSS, ULIP also comes with minimum lock in period of 5 years.
One of the benefit of ULIP which is interesting that one can chose asset class as desired. For example one can chose equity class by taking higher risk gain higher return or can combine equity, debt and money market instrument. This option you will not get in mutual fund as they have their own set of strategy of investment and that cannot be modified.
There are three ways by which policy holder can withdraw funds.
- Death of policy holder : Family of policy holder will not only get sum assured but also returns generated through investment. Also remember that returns in case of death of policy holders are tax free.
- Maturity of policy: Policy holder will get higher of assured benefit or value of investment through unit link. Here, maturity returns are exempt under section 10D of Income Tax Act. This is not possible in mutual fund as the returns are taxable.
- Partial Withdrawal: One cannot withdraw amount before 5 years of policy and age of policy holder has to be 18 years or more to avail partial withdrawal. Every policy comes with distinct minimum and maximum limit of partial withdrawal. It is very important to keep in mind that every partial withdrawal will bring down your sum assured of policy. There are certain policies that offer fixed number of withdrawals and after which every withdrawal is charged fee. Hence it is advisable to avoid partial withdrawal.
Let us look at some down side of ULIP. In ULIP, the return is not guaranteed. It also has some hefty charges involved in.
ULIP is for those who would like to have one product which not only offer insurance benefit but also invest their fund to stock market or money market instrument.
To sum up this article, all three options (ELSS, PPF, ULIP) comes with their own pros and cons. One can set its own parameter with respect to value appreciation, wealth creation, risk horizon and tenure of investment. It is always important to set financial goal taking into consideration tenure and major events (marriage, child education, buying home or car) that is going to take place in one’s life. Invest wisely.