Tax saving is one of the crucial aspects that investors and taxpayers seek to enjoy higher returns and more wealth creation. There are numerous investment options, such as ELSS and NPS, that offer tax deductions under Section 80C of the IT Act.
Here is a comparative guide on NPS vs ELSS to find out which investment option is more beneficial for saving tax.
NPS or National Pension Scheme is a government-backed investment scheme in which individuals can invest while earning to receive a pension after retirement. It is a social security initiative that is meant for long-term investment.
Under the NPS, one can create a sufficient corpus that would support them financially after retirement. On retirement, individuals can withdraw a particular percentage of this corpus and then invest the rest in an annuity.
There are two types of accounts in NPS — Tier I and Tier II. The key difference between the two is that it is mandatory to make at least one contribution per year in the case of the former. Moreover, Tier I comes with a lock-in period, while the second one does not have any lock-in period.
On the other hand, ELSS is an open-ended mutual fund that invests primarily in equity and equity-related instruments. It is a suitable investment option for creating wealth over the long run and saving tax. This is a comparatively popular scheme as it provides higher returns than most tax-saving instruments. Moreover, it comes with a lock-in period of 3 years, which is the shortest among tax-saving instruments.
Individuals can get tax benefits by investing in both NPS and ELSS. However, the tax deduction limit for NPS is more than that of ELSS. Investors can avail of tax deductions of up to Rs. 2 lakh by allocating funds to NPS. They can claim a maximum deduction of Rs. 1.5 lakh under Section 80C and an additional Rs. 50,000 as per Section 80CCD(1B).
However, with ELSS, the tax deduction limit is currently capped at Rs. 1.5 lakh under Section 80C.
Upon maturity, NPS investors can draw up to 60% of the total corpus as a lump sum amount while the remaining 40% is to be invested in annuity. This amount invested in an annuity will provide a regular income to the investors after retirement. Notably, investors will have to pay income tax at the applicable rate on income received as a pension from an annuity. The 60% of the lump sum amount withdrawn is, however, entirely tax-free.
There is more scope for tax deduction with NPS. If the employer of an individual puts up to 10% of the basic salary into the National Pension Scheme, he/she can claim tax deductions under Section 80CCD(2).
NPS is designed to provide a regular income after the retirement of an individual. This income post-retirement, along with the lump sum amount withdrawn, will offer financial stability. The National Pension Scheme will be ideal for those who have a lower risk appetite and those who wish to plan a secure and stable post-retirement life.
ELSS, on the other hand, is suitable for those who aim to avail of tax benefits under Section 80C. However, there is a certain level of risk with ELSS as these mutual fund schemes primarily invest in equity. So, this investment is suited for those who have a high-risk appetite.
Although both NPS and ELSS offer tax deductions, NPS comes with a higher tax deduction limit as compared to ELSS. That said, in addition to tax-saving benefits, one should consider other factors such as risk-bearing capacity, financial objectives, earnings, and others while choosing between NPS and ELSS.