|S. No. ||Factor ||Criteria |
|1. ||Risk and Returns || |
- Fixed rate of return with more safety - NSC, PPF, Bank FD OR
- Market return with more risk - ELSS or ULIP.
|2. ||Lock-in period || |
- Range: Up to 15 years lock-in;
- ELSS has the least lock-in period of 3 years, whereas PPF has the highest of 15 years;
- Others fall in between
|3. ||How return are taxed ||The most crucial part is to look at how the returns are taxed. |
- Only PPF and ELSS offer tax free returns; whereas
- Interest on NSC, Post Office term deposits and bank FDs is taxable
|4 (a) ||Tax Treatment on Maturity || |
- Usually products offer tax deduction on investment
- Few offer tax exemption on returns at the time of maturity
- The taxability on maturity reduces the effective return that an investment offers.
|4 (b) ||EEE or EET category || |
- Exempt-Exempt-Exempt (EEE) tax status - tax benefits at the investment stage, the accrual (accumulation) stage and maturity stage - PPF, ELSS and Life Insurance
- Exempt-Exempt-Tax (EET) tax status - tax benefits at the investment stage and the accrual (accumulation) stage and are taxed at the maturity stage - Bank FDs.
- In the new Direct Tax Code, lot of investment products will shift from EEE to EET wherein these products will be taxed at the maturity stage
|5. ||Maximum Investment Limit || |
- If a product has maximum investment limit in a year, a tax payer will not be able to claim entire tax benefits for any amount invested above the maximum limit;
- PPF has maximum investment in a year of Rs. 70,000
- In case of ELSS and ULIPs there is no maximum investment limit.
|6. ||Liquidity || |
- Most tax saving investment products come with a lock-in period;
- PPF allows partial withdrawal during the 15 years tenure of the investment.
- Tax savings bank FD cannot be broken before maturity and also banks normally don't give loans against these FDs.
- Traditional Life insurance policies and ULIPs allow partial withdrawals but only after completion of 3 years. Also, as an investor you can take loans against life insurance policies.
- An investor can also take loan against NSC Certificates.
|7. ||Inflation protection || |
- Returns from financial products should beat inflation;
- Low fixed returns products are to be avoided by investors during periods of high inflation as they yield negative returns.
- In the long run equities have consistently given higher inflation adjusted returns than returns given fixed return securities.