Tax Savings

NPS or ELSS: Which one is better for tax saving?


Investment is probably one of the best ways to provide safety and security to your finances. It is better than saving your money as it gives you high-scale profits. Besides that, investing your money gives you financial leverage. This helps you have a strong financial footing. While investing your money to have higher returns is important, it is equally important to use the right strategy. But, with so many options available, it might get tricky to find the right one. It should suit your investment goals. 

Before you search more, you need to know about two investment options. Most people across the country prefer widely. They are National Pension Scheme and Equity Linked Savings Scheme. Both NPS and ELSS are taxable and provide tax benefits to the investors. Also, they fulfil different investment goals and requirements. 

In this article, you will learn about the National Pension Scheme and the Equity Linked scheme and its features. Read more to know which option is the better way to save taxes.

What is the National Pension Scheme? What is its objective? 

The Public Fund Regulatory and Development Authority launched the National Pension Scheme. It was then aimed to provide social and financial security to the retired class of the country. It also motivates the working class to invest a specific amount up to retirement. This helps to build a huge corpus and get a regular income through a salary for their entire life. NPS is apt for investors who have long-term investment goals. 

All working class, whether from the public, private, or unorganised sector, are eligible to invest under the National Pension Scheme. It is a great investment option which helps you get a regular steady income after retirement. This is perfect if you are planning for early retirement. You should be investing under this scheme. 

What are some of the exclusive features of the National Pension Scheme?

Some of the features of the National Pension Scheme are:

  1. Easy and convenient access:

You can manage all your NPS savings and track your progress from home via the internet. Also, an e-NPS portal helps you open an online NPS account. 

  1. High portability:

Although it’s a pension scheme, the National Pension Scheme allows you to change your job per your preference. Changing your job in search of better opportunities and a preferable environment will not affect your investment portfolio. 

  1. Versatility:

The National Pension Scheme aims to provide you with various investment opportunities and a selection of Pension Funds. It also allows you to switch to a different investment scheme or fund manager. Choose this if you are uncomfortable with the present ones. 

What is the Equity Linked Savings Scheme? What is its significance? 

The Equity Linked Savings Scheme, or ELSS, is an investment option that invests mainly in equity and equity-related tools. The returns you will get under this scheme are not guaranteed. This is because they are linked to the market. You get many tax benefits on the ELSS funds you generate from the scheme. 

ELSS gained high popularity among investors. It offers you a higher ROI as compared to other tax-saving instruments. One can use it to fulfil long-term and short-term investment goals. But, choose ELSS as a long-term investment option for a better return. This is better than a short-term option. 

Features of the Equity Linked Savings Scheme

Some of the features of the ELSS are:

  1. Lock-in period:

The lock-in period in ELSS is one of the shortest lock-in periods among all the tax-saving options like PPF(15 years) or FD(5 years). The lock-in period probably accounts for a maximum of three years. But other tax-saving instruments offer you a five-year lock-in period on average.

  1. Returns:

Returns under ELSS are highly promising and more than other tax-saving investment schemes. The return rate accounts for 15% to 20%. This is way more than the average tax savings options return rate, that account for 7% to 10%.

  1. The choice of SIP:

The option of SIP or Systematic Investment Plan can be opted for while investing under the ELSS. This allows you to regularly make systematic and periodic investments of a fixed amount. 

Tax savings benefits of NPS and ELSS

Under section 80(C) of the Income Tax Act, 1961, the National Pension Scheme and the Equity Linked Savings Scheme are taxable. But it does offer many tax-related benefits to investors. 

While talking of ELSS, you can claim up to an amount of  INR 1,50,000 a year as a tax rebate. Likewise, this will help you save up to a maximum of INR 46,800 yearly in taxes. You should also be aware that ELSS is the only kind of mutual fund that gives you tax benefits under Section 80(C) of the Income Tax Act, 1961.

While talking of the National Pension Scheme, you can claim up to a maximum of INR 1,50,000 tax benefits in a fiscal year. Moreover, you can claim up to an additional amount of INR 50,000 as a tax benefit with a tax deduction of up to 10% of your salary, including DA, under section 80(CCD-1).

Summing it up:

From the perspective of choosing an investment option, both NPS and ELSS are decent investment options. It depends more on your investment goals, risk appetite, and requirements. If you want stable returns over a longer period, the National Pension Scheme is ideal. If you want higher returns and a good risk appetite, then ELSS is a good option. But for tax saving, NPS is a better investment scheme than ELSS. If you want to know more about different investment schemes and SIPs, you should visit Piramal Finance.