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ELSS OR NPS: WHICH ONE SHOULD YOU CHOOSE FOR TAX SAVING?

Have you opted for the old tax regime and wondering how you can lower your tax outgo? For those who are new to the world of investing, the government of India offers several tax-saving investments that can help you lower the tax outgo. But, with so many investment options available at an investor’s disposable, it might get quite overwhelming to choose the right tax-saving investment for your portfolio. Two of the most common tax-saving investments are National Pension Scheme (NPS) and Equity-Linked Savings Scheme (ELSS). This article aims to provide a comparative analysis between ELSS and NPS help you choose between the two tax-saving investment havens.

What is ELSS?

ELSS funds are tax-saving mutual funds that invest a majority of their assets in equity and equity-related securities. ELSS tax saving mutual funds are accompanied with a three-year lock-in  tenure. ELSS investments are eligible for tax deduction under Section 80C of the IT Act, 1961. ELSS mutual funds offer the dual benefits of tax saving and capital appreciation to investors.

What is NPS?

Sponsored by the government of India, NPS scheme allows employed and self-employed investors to invest and claim tax deductions under Section 80CCD (1). The NPS pension scheme inspires employees to invest in a pension account regularly during their employment period.

Difference between NPS and ELSS funds:

The following table offers a comparative analysis between NPS and ELSS mutual funds:

NPS ELSS
Lock-in tenure NPS has a lock-in period until you reach age 60 or up to retirement ELSS has a lock-in period of 3 years
Minimum annual investment NPS accounts require a initial contribution of Rs 500 each year ELSS requires a minimum investment of Rs. 100 via SIP investment
Expected annual interest rates 7-9% 10-14%
Tax benefits NPS subscriber is eligible for tax benefits of Rs. 1.5 lacs. Additional tax benefits of up to Rs. 50,000 can also availed under Section 80CCD ELSS investments offer tax benefits of up to Rs 1.5 lac u/s 80C of the IT Act, 1961. An investor can save up to Rs 46,800 per annum by investing in ELSS
Where is the money invested? NPS can allot a maximum of 50% of their assets to equity. The rest is invested in government bonds, treasury bills, etc. ELSS funds are mandated to invest a majority of their corpus, at least 80% of their assets in equity and equity-related securities
Premature withdrawal NPS Funds can be withdrawn prematurely within a specific limit and under the condition of purchasing an annuity Funds invested in ELSS cannot be withdrawn before the lock-in tenure of three years
Risk Subject to market risks Subject to market risks
Are the returns taxable? Maturity amount is partially taxable Under ELSS, LTCG (long term capital gains) over Rs. 1 lac is taxed at 10%

Should you invest in ELSS funds or NPS?

Whether you choose to invest in ELSS or NPS must completely depend on your financial objectives, risk profile and investment horizon. Analyse the two options carefully and select the one that best aligns with your investment portfolio. If need arise, you can also avail the services of a mutual fund expert or advisor who can help you with the investment procedure. Happy investing!

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