Conservative investors invest in insurance, Tax Saver FD, NSC or PPF instruments. But if your investment is to create wealth for your retirement, you have to invest in an instrument which gives you inflation adjusted returns and also helps build your wealth. NPS and ELSS would come under such investment objectives. NPS and ELSS have integrated component of both tax planning and retirement savings.Before you think about tax planning and retirement, you have to know what is ELSS and what is NPS and which might be a better option for you. So, lets first learn this and then decide which is the best option for you:
ELSS Mutual Funds
What is ELSS?
Simply put, ELSS is a type of diversified equity mutual fund which is qualified for tax exemption under section 80C of the Income Tax Act and offers the twin advantage of capital appreciation and tax benefits. It comes with a lock-in period of three years.
Why should one invest in an ELSS?
ELSS funds are one of the best avenues to save tax under Section 80C. This is because along with the tax deduction, the investor also gets the potential upside of investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Moreover, compared to other tax saving options, ELSS has the shortest lock-in period of three years.
Comparison of ELSS with other tax saving option under section 80C
(* rates may change as per government directive)
|Tenure||15 years||5 years||3 years|
|Returns||8%* Compounded Annually)||8%* (Compounded
|Linked to equity markets|
|Maximum investments||Rs.1,50,000||No limit||No limit|
|Amount eligible for
deduction under Section 80C
|Rs.1,50,000||Rs 1,50,000||Rs 1,50,000|
|Taxation for interest||Tax-free||Taxable||Dividends and long-term capital gain tax-free|
|Safety/ Rating||Highest||Highest||High Risk|
How does one invest in an ELSS scheme?
Once an investor is KYC-compliant, he can invest in an ELSS scheme just like the way he does in any other mutual fund scheme. Investment can be done by filling the relevant form and writing a cheque, either through online fund house websites or through online portals. It is also possible to invest using SIP or STP.
Advantages of ELSS over NSC and PPF
- The main advantage of ELSS is its short lock-in period. The maturity period of NSC is 6 years and PPF is 15 years.
- Since it is an equity-linked scheme earning potential is high.
- Investor can opt for dividend option and get some gains during the lock-in period
- Investor can opt for Systematic Investment Plan
Disadvantages of ELSS
Risk factor is very high compared to NSC and PPF
It is suitable for all types of investors who are not risk averse and need to invest in tax planning instruments. Though there is no age to get started on an ELSS, it is a good investment to have for those who are just starting their careers as it can help them shed their inhibition about investing in equities through mutual funds in a big way.
What is NPS?
NPS refers to National Pension Scheme. In this scheme both, employer and employee contribute towards NPS Fund. These funds like mutual funds but only seven fund managers appointed by the PFRDA can accept contribution towards NPS Fund. The government employees accounts are taken care of by one of the best three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions,the money invested by others is managed by one of the six fund managers, ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.
What is the tax benefit under NPS?
There are three ways to claim tax deduction by investing in the NPS. Firstly, contributions of up to Rs 1.5 lakh a year are eligible for tax deduction. If your employer has introduced NPS or you invest in the NPS on your own, the amount you contribute to the scheme will be eligible for deduction under Sec 80CCD(1). This deduction comes under the overall deduction available under Sec 80CCE. Secondly, a further deduction is available under Sec 80CCD(2). Under this, if your employer puts up to 10 per cent of your basic salary in the NPS, that amount will be eligible for tax deduction. If your basic salary is Rs 3 lakh a year (Rs 25,000 per month), you can avail an additional deduction of Rs 30,000 (10 per cent of Rs 3 lakh). Another additional deduction of up to Rs 50,000 is available under the new Sec 80CCD(1b). Any taxpayer who invests up to Rs 50,000 in the NPS can avail of this deduction, over and above the Rs 1.5 lakh saved under Section 80C.
What are NPS withdrawal rules?
What is the asset allocation under NPS?
Any NPS Fund would invest only in the following assets:
|Class Of Fund||Invested In||Risk||Average Return Since Launch (%)|
|E||Index based Stocks||Carry market risk like any large cap equity fund||3.79%|
|C||Bonds issued by State Govt, PSUs and Private Firms||Going by the quality of companies, risk would be low.||8.66%|
|G||Bonds issued by Central Govt.||Lacks default risk but volatility can’t be avoided in long term bonds.||5.92%|
Depending on how open the investor is to risk, the corpus can be divided among these three fund classes. Exposure to equity cannot be more than 50%. However if the allocation is not specified, the exposure to various classes, especially equity is decided on the basis of age.
The investment mix according to the age of the investor:
|Age of the Investor||Percentage of Investment in Various Classes|
|Up to 35 Years||50% Equity and 50% Debt|
|40 Years||40% Equity and 60% Debt|
|45 Years||30% Equity and 70% Debt|
|50 Years||20% Equity and 80% Debt|
|55 Years||10% Equity and 90% Debt|
So with increasing age the investment corpus gets more inclined towards Debt
How to open a NPS Account?
Which is better NPS or ELSS?
Popularity of NPS has grown in last 4 years in the second year after announcement of tax benefit, the number of subscribers shot up 83%: from 1.43 lakh in 2012-13 to 2.62 lakh in 2013-14. Then two years ago, the government announced an additional tax deduction of Rs 50,000 under Sec 80CCD(1b). The number of voluntary contributors shot up 148% from 86,774 in 2014-15 to 2.15 lakh in 2015-16. It turned into a deluge after the 2016 Budget made 40% of the NPS corpus tax free, with the number of subscribers in the unorganized sector more than doubling to 4.39 lakh in 2016-17. These numbers are as encouraging as they are worrying. They indicate that tax savings, and not the product features, define the flow of investments in India. This is also the reason why investors blindly buy low-yield life insurance policies every year, unmindful of the poor returns earned from these plans.
ELSS is equity diversified mutual fund which benefits from capital appreciation and tax free dividends. It has a lock-in period of 3 years. NPS plans for your retirement and although it provides additional an income tax benefit of 50000 Rs it has many disadvantages. On retirement at the age of 60, you have to buy an annuity of around 40% of your corpus. You can withdraw the rest of the money, but it will be considered as taxable income and tax will be deducted as per the Income Tax slab applicable to you. If you are withdrawing the money before the age of 60 years, you have to use at least 80 per cent of the money to buy an annuity. Rest of the money, would be taxed as per your Income Tax slab.
In case of ELSS the income is tax free as long term capital gains on equity are tax free after 1 year .You need not redeem the amount after the lock in period. You can continue and hold the investment for your retirement. The potential in terms of returns is higher in ELSS as major allocation is in Equity asset class when compared to NPS which has a cap of 50% on equity instruments. Do not wait till the year end start for investments. Start investing through an Systematic Investment Planning (SIP) which would benefit from volatility of markets.
ELSS would be the best tax saving instrument for young investors. Plan for your goals and start saving. Ask for suggestions from a financial expert before you start investing. Investing for only tax saving would merely end up in wrong investments. And nothing stops you from using ELSS for retirement planning as well.
- Economic Times
Sahil Goel | LinkedIn