ELSS is a mutual fund where you can invest up to 1 Lakh for a lock-in period of three years. Unlike other mutual funds, Equity Linked Saving Scheme or ELSS mutual fund saves taxes. However, if your investment amount is more than 1 Lakh at the time of redemption, then 10% tax will be implicated with tax indexation benefits. After the lock-in period ends, you are free to redeem the amount or switch it into any other scheme.
There are many other tax-saving options like PPF, FD, ULIP etc. These schemes also help you save taxes. But to know what is the most suitable choice for you first need to know the difference between ELSS and other tax-saving schemes.
Difference between ELSS and PPF
Both ELSS and PPF helps you to save taxes, but they vary based on different parameters. PPF is a debt instrument that comes with low volatility. On the other hand, ELSS mutual fund is invested in equity and has high volatility compared to other funds.
ELSS or Equity Linked Saving Scheme are invested on equity, which is subject to market risk while PPF does not come with any risk because the Government of India backs it. Besides, PPF returns are determined by the Government of Indias, but ELSS returns depend on market movements. Generally, ELSS returns are higher than PPFs.
Your money gets lock-in period of 15 years in a PPF. Whereas ELSS has a lock-in period of three years only. You can partially withdraw money from a PPF, but you can not withdraw money from an ELSS until the lock-in period ends. Lastly, you can invest starting from RS 500 to 1.5 Lakhs at maximum in a PPF account. But in an Equity Linked Saving Scheme account, you can start investing from Rs 500 to as much as you want because there is no upper limit.
Difference between ELSS and ULIP
The only similarity between ELSS and ULIP is that both of them are tax saving funds. ELSS is a mutual fund invested on equity while ULIP is a mix of investments and life insurance that is offered by insurance companies.
Equity Linked Saving Scheme is considered to be transparent where factors such as money investment, costs predictability and returns are understandable whereas ULIP is not transparent. In the case of ULIP, the mixer of insurance and investment does not let you have a clear understanding of both components. Besides, your money gets locked-in for an extended period in a ULIP. Thus, you have to compromise on both liquidity and transparency if you invest in a ULIP. On the contrary, ELSS offers both benefits and higher returns.
Difference between ELSS and Bank FDs
Through ELSS, money is invested on equity-related funds, but in a fixed deposit a specific amount of money is kept for a fixed tenure. In the case of ELSS accounts, returns are not fixed and depend on the market variations. ELSS usually provides higher returns. While a 5-year long bank FD has comparatively lower risks but offer lesser returns than ELSS.
During the redemption, if your investment amount in ELSS is more than 1 Lakh, then 10% tax will be implicated with indexation. Whereas, for a tax saving FD, if your amount is more than 1 Lakh, then the tax earned on the fixed deposit is added to your annual income and taxed as per the tax slabs that you fall in.
In comparison to other kinds of tax savings accounts, ELSS always stands out due to its potential higher returns. However, you should consider your requirements to choose an investment option that suits you the best. These points, as mentioned above, may help you to understand the difference between ELSS and other tax saving options.