Saving tax is an important aspect of wealth generation and meeting financial goals. The Income Tax Department offers various ways to reduce tax liability by offering tax deductions on certain expenses and investments. Section 80C of the Income Tax Act, 1961, has a list of investments that offer tax deductions up to Rs.1.5 lakh per year. Of these, ELSS, NPS, and PPF are the most common investments.
Here is a comparison of these investments to help you make a decision.
Before we compare the three, let’s look at what these instruments offer:
The National Pension Scheme is issued by the Government as a social security initiative.
A pension is a sum of money that is created during your employment years by regular contribution. Once you retire, you receive periodic payments from this fund. Hence, you can live a financially independent life despite having no employment.
The NPS is offered to people working in all sectors of the economy – private, government, unorganized, etc. Under the NPS scheme, you invest a fixed amount every year towards your pension fund and receive a monthly pension post-retirement. Your pension account can be ported across jobs and locations.
Once you deposit the money to the NPS account, the fund manager of the NPS invests the corpus into different asset classes like equities, debt, etc. You receive returns based on the performance of the fund.
To mobilize small savings and help people build a corpus for their future, the Ministry of Finance had launched PPF in 1968. This is a fixed-return, long-term investment instrument that offers attractive interest rates. There is an upper limit to the amount that you can invest in PPF – Rs.1.5 lakh per year. You can open a PPF account with an authorized bank or post office.
ELSS funds are diversified equity mutual funds offering tax benefits under Section 80C and a lock-in period of three years. The performance of ELSS funds is linked to the market and based on the risk exposure and investment approach, the fund can generate good returns.
|Tax Deduction on the invested amount||Up to INR 1,50,000 under Section 80C Up to Rs. 50,000 under Section 80CCD(1B)||Up to INR 1,50,000 under Section 80C||Up to INR 1,50,000 under Section 80C|
|Taxability of the Maturity Amount||Partially Taxable – 60% withdrawal amount
Taxable – Annuity pension income
|Taxable – Capital Gain||Exempt|
|Lock-in Period||Up to Retirement||3 Years||15 Years|
|Risk Involvement||Risky as Market Linked||Risky as Market Linked||Safe as Govt-backed|
|Minimum and Maximum Amount of Investment||Tier 1 Minimum Rs 1,000 and Tier 2 Rs 250
No Maximum Limit
|Minimum Rs 500 (for most ELSS schemes)
No Maximum Limit
|Rs 500 Min and Rs 1,50,000 Maximum in one year|
Since each of these instruments has specific features, you need to choose one based on your risk tolerance, investment horizon, and financial goals. Here are some pointers to help you choose:
NPS offers a monthly pension only after retirement. The returns are market-linked. There are two types of NPS accounts:
You can check the amount of return on your NPS investment using the NPS Calculator.
When you invest in a PPF account, the invested amount is locked in for 15 years. You receive interest that is credited to you along with the invested capital on maturity. Therefore, it is ideal for investors with low-risk tolerance and an investment horizon of at least 15 years. Here are some things that you should know about a PPF account before investing:
You can check the amount of return on your NPS investment using the PPF Calculator.
ELSS funds are diversified equity funds. However, they have a lock-in of three years. This is the lowest lock-in across all investments under Section 80C. Each ELSS fund has a different risk level and investment approach. Hence, before investing in an ELSS fund, it is important to read the scheme-related documents carefully. Here are some things to keep in mind before investing in an ELSS fund:
Use ELSS Calculator to know the return and investment amount.
The National Pension Scheme is primarily meant for providing financial stability post-retirement. This scheme is mostly suitable for all those investors who want to plan a secure life after retirement and who have a lower level of risk tolerance.
All such investors who are looking forward to saving taxes under section 80C and have a fair understanding of equity asset class risk must consider investing in ELSS. Also, if you are someone who has a long-term investment horizon, ELSS is the best option for you.
Q1. How to open an NPS and PPF Account?
NPS accounts can be opened in two ways:
PPF accounts can also be opened in two ways:
Q2. What investment choices do you have for NPS?
NPS provides Active Choice and Auto Choice options. Under the active choice, you can select which asset allocation percentage to apply. Under the auto choice, funds are automatically allocated.
Q3. What is the withdrawal facility under a PPF account?
You can partially withdraw money from PPF accounts after 6 years. Maximum 50% of the amount can be withdrawn prematurely.
Q4. How to withdraw money under the NPS account?
Upon reaching 60 years, you can withdraw 60% of the amount as a lump sum. You can also prematurely withdraw under certain conditions.
Disclaimer: The views expressed in this post are that of the author and not those of Groww