ELSS vs NSC – Which is a better investment option?

One investor asked me this ques­tion – Do you think invest­ing in ELSS (equity linked sav­ings scheme) is more prof­itable than National Sav­ings Cer­tifi­cate (NSC)? Before I explain what I answered, let us under­stand what are these products?

Equity Linked Sav­ings Scheme

Pop­u­larly known as ELSS is a tax sav­ing instru­ment pro­vided by mutual fund com­pa­nies. The scheme invests in equity and equity linked related instru­ments. The manda­tory invest­ment period for ELSS is three years. Invest­ment in ELSS qual­i­fies for tax ben­e­fits under sec 80C of income tax act.

National Sav­ings Cer­tifi­cates (NSC)

Pop­u­larly known as NSC is a tax sav­ing instru­ment. This is one of the schemes pro­vided by Post Office (Refer – Invest­ment in Post Office Savings).Investment in NSC also qual­i­fies for tax exemp­tion under sec­tion 80C of income tax act. Lock in period in NSC is six years. The rate of return is fixed at 8% per annum com­pounded half yearly.

ELSS or NSC – Which is better

ELSS is a bet­ter option over NSC in terms of a long term invest­ment as well as tax per­spec­tive. Invest­ment in NSC is locked for a period of 6 years with 8% rate of return whereas for ELSS invest­ment a 3 year lock in period is applicable.

ELSS will give bet­ter return as against NSC from a long term invest­ment stand point. If you invest in NSC and ELSS for 6 years, ELSS returns will be bet­ter than NSC returns.

An investor while sell­ing the ELSS units after 3 years will not be liable of tax as the long term cap­i­tal gain tax is zero. In case of NSC, the returns earned are taxed as per the applic­a­ble tax slab.

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1. Best invest­ment option — Which is it?
2. ULIP vs Mutual Fund – Where should I invest?
3. Invest­ment in Post Office Savings
4. EPF vs PPF – Which is a bet­ter option
5. Sys­tem­atic Invest­ment Plan — All about SIP