National Saving Certificates (NSC) or ELSS: Which is better tax saving option?

Financial planning is a key factor in everyone’s life to secure a better future. Secured financial planning needs the right selection of products before investing. There are many investment products in the market that can save up to Rs 1.5 lakh from Income Tax under Section 80C. But, there are differences in terms of risk and returns depending on the schemes. Today, we are going to tell you which scheme is a better option- National Savings Certificate or Equity Linked Savings Scheme (ELSS) to save Income Tax.

No doubt, if we talk about low risk and better returns, NSC is a better option to invest and save tax. Whereas, ELSS are those in which money can be invested through mutual funds in equity markets. One can invest in other options as well like fixed deposits, Public Provident Fund, National savings certificate, ELSS, and many in the market, through which one can avail tax benefits depending on risk and returns. Whereas, Suresh Sadogopan, Founder, Ladder7 says-“These are two different kinds of products, though contributions to both come under Section 80C. NSC is a simple debt investment product. ELSS is an equity product with a lock-in of 3 years. Hence, one needs to consider the risk, tenure and accordingly invest”.

Who Should Invest in NSC?

Individuals who are looking for a safe investment avenue to earn steady interest and save taxes can choose to invest in NSC. NSC offers fixed interest returns and complete capital protection. Along with this, since this instrument is government-backed, it has low risk and helps to save taxes under Section 80C. However, like other fixed income schemes, NSC cannot deliver inflation-beating returns like tax-saving mutual funds. The government has made NSC easily available for all investors. They are available at all post offices with a simple registration process. 

The government of India has promoted the National Savings Certificate (NSC) as a small savings scheme for individuals. Therefore, HUFs or trusts cannot invest in this scheme. Also, Non-resident Indians (NRIs) cannot purchase NSC certificates. This scheme is only available to individual resident Indians. 

What is Equity Linked Savings Scheme (ELSS)?

Equity Linked Savings Scheme (ELSS) is a mutual fund scheme that invests in equity and equity-related instruments across different sectors and market capitalization. The returns earned from this scheme are directly linked to the stock market. Lately, ELSS funds have become very popular among investors as it has the potential to generate high returns in comparison to other tax-saving instruments. This is a suitable investment option for people with long-term financial goals. 

Investment in ELSS funds comes with a lock-in period of 3 years. Also, investors are allowed to claim tax deductions under Section 80C of the Income Tax Act, 1961 up to Rs. 1.5 lakh in a financial year. Furthermore, one can use Scribox’s ELSS calculator to estimate their returns from investment.

Advantages and Limitations of Investing in ELSS

Advantages

The following are the advantages of investing in ELSS funds

• ELSS funds have the shortest lock-in period of 3 years in comparison to other tax-saving instruments like tax-saving fixed deposit (5 years), PPF (15 years), etc. 
• Unlike ELSS where the returns are linked to market performance, other 80C tax saving instruments like PPF, FD, or NSC are fixed income products. ELSS has the potential to deliver significantly higher returns in the medium to long-term horizon.
• It is the only scheme that allows investors to save tax under Section 80C  as well as earn high returns from equity funds.
• If the investors are happy with the returns and do not need money at the end of 3 years, they may choose to continue. Redemption is not compulsory at the end of the lock-in period. 
• With the virtue of its lock-in period and disciplined long-term investment, investors can benefit from the power of compounding in the long run. 
• While investing in ELSS, investors may choose to SIP where it allows investors to invest a fixed amount in regular intervals generally every month. 
• Investing in mutual funds is safe and transparent as all the companies come under the purview of SEBI. Also, the investments are professionally handled by a fund manager. 

NSC vs ELSS – Difference Between NSC and ELSS

The following are the key differences between NSC and ELSS funds