ELSS or NSC: which option saves more tax and offers better returns?

• ELSS offers higher long-term returns but comes with higher risk than NSC
• NSC provides fixed returns and is suitable for shorter investment horizons
• ELSS is advised for young investors with a 10-year goal seeking tax benefits.

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Does Equity Linked Saving Scheme (ELSS) of mutual funds or the National Savings Certificate (NSC) give better returns while saving more on taxes? Today’s Ask Wallet Wise explains how Section 80C applies.

The Ask Wallet-Wise initiative offers expert advice on personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try to get a top financial expert to address them.

I am a 28-year-old working professional and follow the old tax regime. I want to invest Rs 1.50 lakh a year under Section 80C but I am confused whether I should invest in the ELSS or the NSC. I do not need this money for the next 10 years. My purpose is to save tax and maximise returns.

Expert’s advice: There are various products for availing tax benefits under Section 80C. These range from insurance products to bank tax-saving fixed deposits to ELSS, etc. and are available as deductions only under the old tax regime. The suitability of a particular investment product depends on factors such as your risk appetite, available time horizon, and near-term liquidity requirements.

NSCs offer you a fixed rate of interest for the next five years. There is no scope for you to maximise your returns by investing in NSCs. Looking at the fact that your time horizon is around 10 years, in my opinion, the Equity Linked Saving Scheme of mutual funds, popularly known as ELSS, is better suited for you.

ELSS funds are basically equity funds and are thus risky for short duration but have the potential to give you better returns as compared to NSC in the long run. Though ELSS schemes have a three-year lock-in period, you should not expect them to deliver better returns in that time. There is also a probability that the value of your investment in these ELSS will fall below your purchase price at any time during the three-year lock-in period.

So, though technically you can redeem your investment at any time after three years, you may have to continue investing in ELSS beyond three years if the market is not in good shape when your investment completes three years.

If you are investing in ELSS funds or, for that matter, in any equity scheme of a mutual fund, you should have a minimum time horizon of right to 10 years. Since you are young, you can afford to take on a higher level of risk and invest in ELSS funds to gain equity exposure. But if your time horizon is shorter than seven years, you should consider investing in NSC or a tax-savings bank fixed deposit (FD) to avail of tax savings under section 80C. For investing in ELSS, I would suggest the systematic investment plan (SIP) route to spread your investment over the year. Interest on NSC is taxed at the slab rate, whereas capital gains on ELSS are taxed at 12.5 percent.