In recent years, investors have been drawn to mutual funds instead of small savings schemes like PPF and NSC. Last 2-3 years, there has been significant increase in investments toward ELSS (Equity linked Saving schemes). Reason is “returns”. Interest on small savings schemes (PF, PPF, NSC etc) have come down, (PPF interest rate came down from 8.7 percent in 2016 to 7.6 percent at present) whereas, few good ELSS schemes have given over 15 % CAGR (Compounded Annual Growth rate) for last over 10 years.
Difference between National Saving certificate (NSC) and Equity Linked Savings Scheme (ELSS)
|Minimum investment||Rs 100||Rs 500 (for sip) & Rs5000 for one time investment|
|Maximum investment (can be claimed as tax deduction)||Rs 1.5 lakh||Rs 1.5 lakh|
|Tenure||Lock in for 5 and 10 years||Lock in for 3 years|
|Risk factor||Zero risk||High risk, market linked|
|Interest rate||8.5% pa for 5 year term & 8.8% pa for 10 year term||Not fixed, market linked.|
|Frequency of interest accumulation||Interest is compounded half yearly||NA – All market linked|
|Fixed return||Yes||Returns are not fixed|
|Income Tax deduction applicable?||Yes, under Section 80CC of IT Act||Yes, under Section 80CC of IT Act|
|Tax liability||Interest earned is taxable||Maturity (interest & principal) is not taxable|
Which one to choose – NSC or ELSS
Both NSCs and ELSS offer unique features, and one needs to factor in the individual requirement before opting for either of them. While ELSS offers better returns, it is subject to market risks and in the event of unforeseen crash, even capital (principal invested) can be eroded. On the other hand, NSCs offer fixed returns. Ensuring a certain amount at the end of the term. Investors with risk appetite can opt for ELSS. Investors seeking security and fixed returns may choose NSCs. Some ELSS plans have been known to offer returns at the rate of 25 to 30%, which when compared to the 8.8% returns of NSCs, ELSS seem very enticing. However, keep in mid all investments in ELSS are subject to market risks.
This Table which compares ELSS, PPF, NSC and Bank Tax Saving Fixed Deposit.