Some people may get confused while choosing between Equity Linked Savings Scheme (ELSS) and the National Pension Scheme (NPS) to save tax on investments. Knowing a few key differences will help you to select the right tax saving instrument.
Mutual funds are a valuable investment option if one is interested in wealth creation. These funds put in money across a variety of equity and debt instruments so that an investor can get returns at periodic intervals. Equity Linked Savings Scheme or ELSS is one option that is popular among investors. It is an open-ended mutual fund that allows individuals to save tax by way of investment in equity and equity-linked instruments.
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Due to the tax saving nature of ELSS and its investment pattern, some people may get confused between the mutual fund and the National Pension Scheme (NPS). While both plans help to save taxes, there are some differences.
Take a look at the differences between NPS and ELSS and which can be a better option for you.
Key differences between NPS and ELSS
Types of plans: ELSS is a mutual fund program while NPS is a government-backed voluntary social security scheme.
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Risk: ELSS is riskier than NPS as it’s a market-linked instrument. The returns are dependent on market fluctuations. On the other hand, NPS gives a secured return.
Minimum investment: NPS has two types of accounts – Tier I and Tier II. For Tier I account, the minimum investment is Rs 1,000. A minimum of Rs 250 is required for investment in an NPS Tier II account. ELSS plans require a systematic investment plan (SIP) of at least Rs 500.
Lock-in period: ELSS mutual funds come with a lock-in period of three years. On the other hand, NPS investments have a lock-in period till the investor reaches retirement age of 60 years. Investors can even extend their NPS account tenure till the age of 70. There is only partial withdrawal allowed for specific reasons till the account holder is of 60 years or the account completes 10 years. ELSS is more flexible than NPS in this regard.
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Tax benefits: NPS investors can get tax deductions of up to Rs 1.5 lakh under Section 80C of Income Tax Act, 1961, as well as an additional benefit of Rs 50,000 under Section 80CCD. ELSS investors can get Rs 1.5 lakh only in tax benefits.
NPS vs ELSS: Which is better for you?
If you are looking for investments with a shorter lock-in period and higher returns, ELSS is a better idea. If the focus is on creating a corpus for retirement, NPS could be a good option. In case the goal is saving on tax, NPS could be the more appropriate choice. The scheme you must opt for depends on your financial goals and needs.
