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NPS vs ELSS – Which is a better tax Saving Option?

NPS vs ELSS – Which is a better tax Saving Option?

One of the most significant parts of growing wealth is tax savings. You can save money on taxes by investing in a variety of ways. Section 80C lists a number of investments that qualify for tax deductions of up to Rs. 1.5 lakh. In this post, we will compare two common systems, NPS and ELSS, and their differences. Let’s understand NPS or ELSS, which is better suited for you.

Overview

NPS, i.e., the National Pension Scheme, was initiated by the Indian government where individuals of any job profile can invest their money and receive a pension after retirement.

ELSS, known as the Equity Linked Saving Scheme, is a mutual fund instrument. It is the only mutual fund eligible for tax deduction under section 80C of the Income Tax Act 1961.

What is National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-backed retirement savings initiative aimed at providing financial security post-retirement. 

Individuals can accumulate a corpus for their retirement years. When you invest in NPS, the funds are managed by professional fund managers who invest in a diversified portfolio of equity, corporate bonds, and government securities. 

One of the key features of NPS is that it offers partial withdrawal options for specific purposes such as higher education, home purchase, or medical emergencies. What’s more, contributions made to the NPS are eligible for tax deductions under Section 80C and an additional benefit under Section 80CCD(1B). This scheme is ideal for long-term financial planning and disciplined retirement saving.

Additional Read: How to Open an NPS Account Online

Equity Linked Savings Scheme (ELSS)

Equity Linked Savings Scheme (ELSS) is a type of mutual fund that invests primarily in equities, offering the dual benefit of tax savings and capital appreciation. ELSS comes with a mandatory lock-in period of three years, which is the shortest among tax-saving instruments under Section 80C. 

With ELSS investments, you can claim tax deductions of up to Rs. 1.5 lakh in a financial year. ELSS offers the potential for high returns due to its equity exposure, making it ideal for long-term wealth creation. 

Difference between NPS & ELSS

Let’s compare NPS vs ELSS and find which seems to be the better investment option.

NPS or ELSS, which is better in terms of lock-in period

Both the schemes have a significant lock-in period. While the ELSS has a lock-in of 3 years, the NPS has a lock-in period until retirement or until the age of 60, whichever comes later. In NPS vs ELSS, the former has an edge if your investment horizon is short.

NPS vs ELSS, which has better liquidity:

While ELSS doesn’t allow the investor to withdraw prematurely from the fund, NPS offers a choice. You can prematurely withdraw from the scheme. However, you will be obliged to purchase the annuity.

ELSS vs NPS, which has better tax benefits:

Both these schemes provide tax benefits to the investor. ELSS is eligible for a tax deduction of Rs. 1.5 lakhs under section 80C of the ITA. The NPS offers benefits of Rs 1.5 lakhs under the same section but provides an additional deduction of 50,000 under section 80CCD 1B of the Income Tax Act. In the question of ELSS vs NPS, NPS has a clear advantage.

NPS vs ELSS, which has minimum investment:

To determine which is better, ELSS or NPS area of comparison is the investment threshold. ELSS requires the investor to invest at least Rs. 500 through SIP or lumpsum. However, in NPS, you must make a minimum annual investment of Rs. 1000. The amount per contribution is Rs. 500 for Tier I and Rs. 250 for a Tier II account.

Additional Read: Understanding the ELSS Lock-in Period

Returns of NPS or ELSS, which is better?

ELSS schemes park 90-95% of your invested funds in equity. However, NPS allocates 50% of the invested amount to equity. The remaining 50% is dispersed into government bonds and securities, treasury, investment funds etc.

 In terms of NPS vs ELSS, returns both are influenced by the highs and lows of the market.

ELSS vs NPS, which is subject to risks?

While both schemes are subject to market risks, ELSS possesses a higher risk than NPS as most of the amount invested is into the equity. However, here, your fund is actively managed by a fund manager. 

Which is better, ELSS or NPS, in terms of taxation gains?

ELSS funds with a capital gain of more than Rs. 1 lakh are bound to tax deduction under LTCG. In NPS, the investor can withdraw a 60% lump sum amount from the scheme rendered tax less. The remaining 40% received over time as a pension is considered income, taxable under the ITA.

While both have their pros and cons, conducting NPS vs ELSS analysis provides a much better insight into which could be the right choice for you as per your requirement.

In terms of NPS vs ELSS returns, the latter possesses a higher risk due to being market dependent, but it also promises higher returns. On the other hand, NPS is suitable for investors that are looking for a low-risk wealth generation scheme. It is more suited for retirement planning.

To determine NPS or ELSS, which is better is difficult. You should make the decision based on your personal goals, financial stability, and risk appetite.

Which is better, ELSS or NPS?

While ELSS offer higher returns and shorter lock-in period, NPS offers higher tax deductions and lower returns with assured income in your twilight years. Both schemes are equally beneficial with their own mannerisms. As an investor, you must decide which is better, ELSS or NPS, based on your investment objectives and financial fitness.

Why choose Moneyfy by Tata Capital?

When looking to park your funds in investment schemes for wealth generation, tax benefits, and retirement planning, turn to the Moneyfy app. Tata Moneyfy's Investment app enables you to indulge in goal-based investing. You can easily compare different types of investment schemes and fund houses and conduct ELSS vs NPS analysis to choose the right instrument for you to accomplish your financial goal.

FAQs

Is NPS better than ELSS?

NPS offers long-term retirement benefits with lower risk, while ELSS provides higher potential returns with a shorter lock-in period. NPS is better for retirement, while ELSS suits wealth creation and tax savings.

What is the best alternative to NPS?

Some great investment alternatives to NPS include Public Provident Fund (PPF), Employee Provident Fund (EPF), and mutual funds like Equity Linked Savings Schemes (ELSS), which offer tax benefits and flexible investment options for retirement and financial growth.

Is it better to invest in NPS or mutual funds?

NPS is ideal for conservative, long-term retirement planning with tax benefits, while mutual funds, especially ELSS, offer higher returns and flexibility but come with increased risk. Your choice depends on your risk tolerance and financial goals.