This is in response to a comment posted by Ankur on my earlier post - Tax Saving for free! . This reply is for the benefit for everyone who would like to know this and therefore I've made a new post out of this instead of a comment.
You cannot compare apples with oranges. As a means of tax saving, ELSS and NSC are comparable but not when it comes to liquidity and returns potential(well, risk is another parameter here). NSCs are the poor and uninformed choice in case one can go in for a slightly higher risk(in the case of ELSS as it is equity oriented).
The lock in period for ELSS is 3 years while it is 6 years in the case of NSCs.
Another fact, ELSS dividends and redemptions after 3 years are completely tax free while the interest income from NSC is taxable. Taking a five year horizon, the post tax return from NSC comes out a POOR 11.25% p.a. only while the average post tax return from ELSS funds over the corresponding 5 year period is upwards of 80% p.a.
I guess you'd already know that equities tend to give the best returns over the long term, so tax saving for the long term will be definitely better in the ELSS way than the NSC way. It also beats inflation over the long term thereby giving the best real returns. Finally the disclaimer, ELSS returns are not guaranteed unlike NSC.
Trust this all will prove the point sufficiently, otherwise I have all the time in the world to validate my views! Thanks for the comment btw, keep 'em coming! As a parting shot, here is an illustration on the kind of brutal out performance of the ELSS over the others(read NSC, PPF etc):
How does an ELSS give you the two-in-one advantage of saving tax and wealth-building? The graph below is an eye opener.
If three separate investments of Rs. 1,000 each were made in June 1999 into NSCs, PPFs and in an ELSS, how would they fare? The Rs. 1,000 invested in an ELSS would be worth approximately Rs. 12,266 today. In sharp contrast, none of the fixed rate savings would be worth more than Rs. 2,077. If you are willing to ride the ups and downs of the market, you may find that an ELSS could be an ideal way to save tax and create wealth for your future.
Sources: ELSS data - ICRA MFIE. PPF, NSC Data - Indian PublicFinance Statistics 05-06, Ministry of Finance (Department of Economic Affairs). To represent ELSS, we have considered the performance of the five largest ELSS funds that published their first NAVs on or before June 30, 1999. Assumes an investment of Rs. 1,000 begun on June 30, 1999. PPF - Assumes Rs. 1,000 invested in the Public Provident Fund. For the purposes of simplicity, rate changes announced any time during a month are assumed to be effective for the entire month for the purposes of calculating accrued interest at the end of the month. Interest for the month is calculated by dividing the effective annual PPF rate by 12. For the purposes of simplicity, interest is assumed to accrue on monthly balance in the PPF account. Portfolio value shown here is notional value based on accrued interest till Jun 30, 2007 only. NSC - Assumes Rs. 1,000 invested in NSC at the prevailing interest rate. Assumes half-year compounding at prevailing interest rate. Past performance may or may not be sustained in future. The minimum amount actually required for these investments may be more or less than Rs. 1,000. This graph is for illustrative purposes only. Ending values are rounded off.