Every citizen would ideally want to avoid paying taxes. Sadly, that isn’t possible, although there are ways to decrease your tax liability. One of the methods is to invest in a tax-saving scheme. This article will give you an insight into two such investment schemes — Equity-linked Savings Scheme (ELSS) and National Pension Scheme (NPS).
What is ELSS?
A mutual fund is a type of investment scheme where different investors pool in a certain amount, which is invested in equity and debt instruments by a fund manager. The returns are more than decent, but the problem is that you have to pay tax on it. This makes an ELSS better than mutual funds since it works the same way as mutual funds and saves tax at the same time.
Like mutual funds, ELSS too is managed by experienced experts who invest in worthwhile equity-related instruments to multiply investors’ money. Annual benefits up to ₹1.5 lakh are there for the taking by investing in ELSS funds. Investors can pump in more than ₹1.5 lakh as well, but tax benefits will be allowed only up to ₹1.5 lakh.
The scheme has a lock-in of three years, which is substantially lower than most other tax saving schemes.
What is NPS?
NPS is a government-backed scheme, wherein professionals invest in NPS funds. They are a well-diversified portfolio consisting of government bonds, corporate debentures, and equity shares, to name a few. Once you invest in an NPS fund, the money grows at a consistent rate and accumulates to a big amount on retirement. Therefore, it is recommended that you do not withdraw the money from the NPS scheme until retirement.
Investments in NPS are applicable for tax deductions up to ₹1.5 lakh under Section 80CCD (1). It also qualifies for additional tax savings of ₹50,000 under Section 80CCD (1B).
Which one is better for tax saving?
Well, that actually depends on the kind of investor you are. Those with a high risk appetite prefer ELSS, while more conservative investors choose NPS. Here’s a quick comparison between the two schemes.
- Lock-in period
An ELSS comes with a three-year lock-in. NPS accounts, meanwhile, cannot be fully withdrawn until the age of 60, with partial withdrawal up to a certain limit allowed for certain accounts.
ELSS has greater liquidity compared to the NPS. After the conclusion of the three-year lock-in period, you can withdraw the entire amount. As for NPS accounts, the feature isn’t available even when you turn 60. You can only withdraw 60% of the amount at the juncture. The remaining 40% has to necessarily be used for purchasing an annuity.
- Asset diversification
This is where the NPS has an upper hand over an ELSS. The money invested in an NPS account is invested in various instruments such as government bonds, corporate bonds, and equity shares. This allows the money greater opportunities for growth. An ELSS, meanwhile, is somewhat one-directional in its approach. The funds are used to purchase equity-related instruments only. This can lead to wealth erosion if the market crashes.
Given their respective advantages, selecting between both the NPS and ELSS Funds can seem to be a difficult job. Without a doubt, NPS Funds are more tax-efficient than ELSS Funds, but that can’t be the only factor to consider.
Therefore, it is always a good idea to make a proper financial plan for yourself. Every individual’s financial plan needs to include tax planning. Investing a small sum of money here and there will not necessarily meet all of your financial needs and goals.
As a result, in order to get the most out of your savings, you should carefully consider all investment options and conduct proper tax preparation before investing your money into anything.