Understanding Section 80C Benefits: ELSS vs Other Tax Savings Options
Section 80C of income tax offers one of the most preferred ways for individuals to reduce their taxable income in India. It allows a maximum deduction of ₹1.5 lakh per year on the investments made in specified financial instruments.
This deduction can reduce the amount of tax you owe, making it a crucial component for financial planning. With many options of tax savings available under 80C, ELSS (Equity Linked Savings Schemes) stand out as an attractive choice among long-term investors, but how does ELSS compare with other tax-savings instruments?
Let’s explore the Section 80C tax-saving options and their benefits, with a special focus on ELSS, and understand how each option works to help you make an informed decision.
Equity-Linked Savings Schemes (ELSS)
ELSS are mutual funds that primarily invest in equities and offer tax benefits under Section 80C. They come with a lock-in period of 3 years, the shortest among all tax-saving options under 80C. ELSS is an attractive option for those who are comfortable with market linked investments, higher risks and higher potential returns. Since these funds invest primarily in equities, they provide the opportunity to take advantage of the stock market in the long term with the power of compounding. This advantage of ELSS can boost returns over time.
Public Provident Fund
The Public Provident Fund (PPF) offers tax benefits under Section 80C. It has a long lock-in period (15 years) and is considered one of the safest investment options in India. It is suited for conservative investors who are looking for stability and long-term growth. PPF's guaranteed returns make it an ideal choice for individuals who prefer a predictable outcome without the volatility of the stock market. However, please note that PPF rates are subject to change. From 8.8% in FY 2012 - 2013, rates have fallen to 7.1% in FY 2024-25.
Source: National Saving Institute
National Savings Certificates
NSC is a fixed-income savings scheme that provides tax benefits under Section 80C. NSC offers fixed returns and comes with the backing of the Indian government, making it a low-risk option for conservative investors. NSC is particularly useful for people who want to lock in their money for a fixed term and are comfortable with the 5-year maturity period. It provides a safe, consistent growth of capital.
Senior Citizens Savings Schemes
The Senior Citizens Savings Scheme (SCSS) is a government-backed savings option available only to senior citizens (aged 60 years and above). It offers tax benefits under Section 80C. This scheme is specially for the people who are above the age of 60, who are looking for the safe and secure option to invest and generate regular income during their retirement years. The scheme offers higher interest rates than most other fixed-income instruments, making it a strong contender for retirees.
Tax-Savings Fixed Deposits (FDs)
Tax-saving Fixed Deposits are similar to regular fixed deposits but come with a 5-year lock-in period, making them eligible for tax deduction under Section 80C. Tax-Saving Fixed Deposits offer a low-risk, guaranteed return option for individuals who want to secure their capital while taking advantage of tax deductions. These FDs are available with a lock-in period of 5 years, during which the principal amount remains untouched. The interest earned on tax-saving FDs is taxable, they offer stability and the assurance that the initial investment will be preserved. Investors can choose between monthly, quarterly, or annual interest payouts, allowing them to match the investment to their income needs.
Sukanya Samriddhi Yojana
SSY is a scheme specifically for the girl child. It also offers tax benefits under section 80C. This scheme can be accessed by parents and legal guardians for their girls up to the age of 10 years. SSY provides one of the highest interest rates among government schemes and comes with a lock-in period until the girl child reaches 21 years of age. The scheme is particularly beneficial for parents planning for their daughter's higher education or marriage expenses, offering both attractive returns and tax benefits.
ULIPs
Unit Linked Insurance Plans are another investment instrument that combines insurance coverage with investment and tax benefits under section 80C. These plans have a mix of equity and debt funds based on the holder's choice. ULIPs come with a lock-in period of 5 years and offer the flexibility to switch between different fund options based on market conditions and risk appetite. The premium paid qualifies for the tax deduction, and the maturity amount is tax-free under Section 10(10D).
ELSS vs Other Tax-Saving Instruments: A Quick Comparison
| Feature | ELSS | PPF | NSC | SCSS | Tax-Saving FD | SSY | ULIPs |
| Tax Deduction | Up to ₹1.5 lacs | Up to ₹1.5 lacs | Up to ₹1.5 lacs | Up to ₹1.5 lacs | Up to ₹1.5 lacs | Up to ₹1.5 lacs | Up to ₹1.5 lacs |
| Lock-In Period | 3 years | 15 years | 5 years | 5 years | 5 years | 5 years | Until girl child turns 21 |
| Current Rate (FY2024-25) | Market-linked | *7.1% | *7.5% | *8.20% | 5.5%-7.5% Varied as per bank | Market-linked) | *8.2% |
| Tax on Returns | LTCG (12.5% on gains > ₹1.25L) | Tax-free | Taxable (As per the Investors Slab) | Taxable(As per the Investors Slab) | Taxable(As per the Investors Slab) | *Tax-free on maturity | Tax-free |
| Risk Level | High | Low | Low | Low | Low | Moderate | Low |
*Note- Source: National Savings Institute II Rates are as of FY 2025 II ULIP maturity proceeds become tax-free if the annual premiums do not exceed Rs 2.5 lacs (with effect from Feb 1, 2021).
However, please note that PPF, NSC, SCSS, and SSY rates are subject to change. For example in PPF, the rates were 8.8% in FY 2012 - 2013, which have fallen to 7.1% in FY 2024-25
Conclusion
Now, as you are aware of available investment options and tax savings benefits of section 80C, you might be wondering which one is the right investment option for you. While, choosing the right tax-saving instrument depends on your financial needs, risk tolerance and most importantly the investment horizon. ELSS, out of all the investment options, stands out for its higher growth potential along with the shorter lock-in period. It is ideal for all aggressive investors looking to maximize returns, save on taxes.
Other options like PPF, NSC, SSY, ULIPs and Tax-saving FDs are more likely for conservative investors who prioritize safety, and predictability of returns. Lastly, a diversified approach that combines ELSS with other options can also provide the right balance of growth, safety and liquidity based on your individual financial need.Take the guidance of a mutual fund distributor for the right investment guidance or to understand more.