Your retirement kitty is a product of a lot of planning and deliberation. However, are there still some investment choices that you have not made up your mind about? For instance, is NPS better than ELSS? Or is the latter a better mode of investment than the former? On what basis should you pick one over the other? Should you invest in both? Read on to find your answers.
Like any other investments there are a lot of similarities between ELSS and NPS, let’s take a look at them.
Basis | ELSS | NPS |
Meaning | ELSS funds are diversified equity funds with a three year lock-in period. | It is a government retirement scheme meant to develop a sizable corpus for retirement. |
Equity exposure | The equity exposure can go up to 100%. | The equity exposure is merely 50 to 75%. |
Risk | The risk depends on market fluctuations. | Lower risk as the equity exposure is capped at a level. Also it is government backed. |
Asset class | Investors allocate into equity | Investors allocate funds into 4 asset classes namely, Equity, Corporate Debts, Government Bonds and Annuity. |
Fund manager | You can choose between ELSS funds from different AMCs | Can change fund manager every financial year. |
Historical performance of returns | Historical returns in the range of 12+% | Delivered approximately 8 to 10% returns on average annually. |
Lock in period | It is for 3 years. | Usually till retirement. |
Premature withdrawal | It cannot be prematurely withdrawn. | It can be prematurely withdrawn but within certain limits. |
Minimum contribution | Minimum is Rs. 500 or even Rs 100 in some funds. There is no maximum. | Minimum is Rs. 1000. There is no maximum. |
Tax benefit | The contribution is exempt from tax up to Rs 1.5 lakh. On redemption, Capital Gains tax may be payable | The entire amount is tax-free i.e. EEE. But the annuity that you get from NPS is subject to tax. |
If we were to solely look into the tax treatment of both these investment options, then the following would present itself before us –
Feature | NPS | ELSS |
Tax deduction on the amount invested | For NPS sums up to Rs. 1,50,000 is exempt under section 80C and a further Rs. 50,000 is exempt under Section 80CCD(1B). | For ELSS sums up to Rs. 1,50,000 are exempt under Section 80C. |
Tax on maturity amount | The maturity amount is partially taxable on 60% withdrawal amount. It is fully taxable on the annuity pension income. | The maturity amount is taxable under capital gains tax. The long-term capital gains are zero up to Rs. 1,00,000. Long Term Capital Gains tax to be taxed at 10% without indexation benefits for amounts exceeding Rs. 1,00,000. |
Both the investment options are great choices if the main goal is to save on taxes. NPS has a slight edge over ELSS funds in this area particularly as it falls under the EEE category and no capital gains tax has to be paid by the investor on the NPS amount.
Experts believe that if a proper decision regarding this dilemma is to be arrived at then one has to deliberate and weigh the following considerations – probable age of retirement, the amount of corpus that needs to be accumulated, the investment horizon and the risk profile of the investor.
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