As the new 2020-21 fiscal year has already started, taxpayers are in a rush to finish their tax planning process. With numerous tax-saving opportunities open to them, taxpayers frequently face the question of where to spend. Specifically, risk-taking investors aiming for double-digit long-term yields are reluctant to participate in the Equity Linked Savings Scheme (ELSS) with markets floating near all-time peaks and Nifty PE being close to 40, even though it has offered decent yields.
Additionally, in the recent past, NPS, which is a strong substitute to ELSS, has garnered a lot of popularity. In such a scenario, risk-taking investors can spend in order to save tax and also earn competitive returns. Investors usually evaluate various tax-saving strategies on different metrics, such as return prospects, investment security, liquidity, value, tax efficiency of returns and simplicity of investment. ELSS ranks high on most of the metrics, taking into account all these variables. On average, the last five-year return on ELSS funds was 13.2 percent.
The lock-in duration of ELSS schemes is three years, which is the smallest of all tax-saving schemes accessible and has the potential for higher earnings. That being said, if you are actually looking for a one-time bet in ELSS schemes, it is not recommended at all, as Nifty is trading at a PE of 40. In order to invest in ELSS initiatives, taxpayers should instead pursue the SIP path. But if you are in a rush to deliver investment proof to your employer, at this point, the SIP path can not pursue you.
On the other side, NPS bears less risk than ELSS strategies and provides an additional deduction under Section 80CCD (1b) of up to Rs 50,000. NPS also encourages investors to pick their asset mix and adjust the manager of their fund. Of all market-linked instruments, the investment management charges of 0.01 percent are the lowest. NPS strategies have done better thanks to stock and bond surges. NPS funds had prior 5-year returns in the range of 11-14.3 percent. But the greatest drawback to NPS is that after maturity, till retirement the investment stays locked in.
In NPS, by choosing an optimal combination of equity, government securities, corporate debt and alternative investments depending on his or her risk profile, an investor has the freedom to plan his portfolio. That being said, given that equity markets are at an all-time record pace, new investors should not be able to allocate equity and gilt funds more broadly. They will steadily raise their allocation of these investments.