Saving taxes is something which excites everyone. There are many investment schemes like Equity Linked Saving Scheme, National Pension Scheme, Tax saving FDs, NSC, PPF which offer tax benefits under Section 80C. In this article, we’ll look into two of the above schemes namely ELSS and NPS.
1. Equity Linked Savings Scheme(ELSS)
Equity Linked Saving Scheme aka ELSS is a tax saving mutual fund where one can save up to Rs. 1.5 lakhs in a financial year under Section 80C. It has the shortest lock-in period of 3 years with long-term capital gains over 1 lakh being taxed at the rate of 10%.
2. National Pension Scheme(NPS)
National Pension Scheme is a Government Scheme in which individuals can invest during their earning years so as to get a pension upon retirement. Investments in NPS offer a tax deduction of Rs. 1.5 Lakh under Section 80C of the Income Tax Act and an additional deduction of Rs. 50,000 under Section 80CCD (1B) of the said Act.
3. Comparative Analysis between ELSS and NPS
| Equity Linked Savings Scheme (ELSS) | National Pension Scheme (NPS) | |
| What is the lock-in period? | ELSS has a lock-in period of 3 years. | NPS has a lock-in period up to retirement. |
| What is the minimum annual investment? | You can invest Rs.500 either as a lump sum or SIP investment. | You can invest Rs.500 as an initial contribution, but need to invest a minimum of ₹6000 in a year. |
| What are the tax benefits? | Can claim tax deduction up to Rs.1.5 Lakh PA under Section 80C of Income Tax Act | Can claim a tax deduction up to Rs.1.5 Lakh PA under Section 80C and an additional Rs.50K under Section 80CCD (1B) of Income Tax Act. |
| Where is the money invested? | The entire amount is invested in equity in a diversified manner and is monitored regularly. | A maximum of 50% is invested in equity. The rest is distributed in government bonds, treasury, etc |
| What about premature withdrawals? | Funds invested in ELSS cannot be prematurely withdrawn. | You can withdraw prematurely within certain limits and under the condition of purchasing an annuity. |
| Are returns taxable? | LTCG over Rs.1 Lakh is taxable at 10% | The maturity amount is partially taxable. |
Even though NPS offers tax benefits of up to Rs. 2 Lakhs PA, as opposed to the ELSS tax benefits of up to Rs. 1.5 Lakh. However, ELSS is still the better investment option flexibility and opportunity to earn higher returns with a lock-in period of only 3 years.
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