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NPS vs. ELSS: Which Investment is best? Research Team | Posted On Tuesday, November 26,2019, 04:14 PM

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NPS vs. ELSS: Which Investment is best?



Whether you aim to create a retirement corpus or generate wealth equity-linked products can give you way more returns than conventional investment instruments. As such a comparison between NPS and ELSS will help you understand how you can generate inflation-beating returns over a fixed tenure. 

What is NPS?

NPS is a government-backed pension scheme wherein Indian citizens can invest during their service years to get pension on retirement. It is a voluntary contribution pension scheme where the contributions are invested in a mix of assets and the maturity proceeds are dependent on how these assets perform at the market.

Upon investment in NPS, subscribers are eligible to open two types of accounts namely Tier 1 and Tier 2 NPS accounts. You can only open a tier 2 account if you have an active tier 1 account.

NPS also qualifies for tax exemptions under section 80C where an individual can claim tax benefits up to Rs. 1.5 Lakh per year. Upon NPS investment you can claim an additional tax deduction of Rs. 50,000 under section 80CCD (1B) of the Income Tax Act, 1961.

See Also: NPS Returns for 2019

What is ELSS?

Equity-linked saving scheme is a type of mutual fund where you can invest a lump sum or make regular payments through SIP for investment in the equities market. ELSS has a lock-in of 3 years and therefore you cannot sell your investment before 3 years of its maturity. In the case of ELSS SIP investments, each instalment is locked in for tenure of 3 years. It comes with tax benefits under section 80C and thus it is one of the best ways to grow your money along with tax benefits.

NPS vs. ELSS: Which Investment is best?

Security of Investment:

ELSS funds are pure equity investments that provide high exposure to equities. It invests almost 80% of the investible corpus in equities whereas NPS have capped equity investments to a maximum of 75%.

The NPS investors are given two choices namely, auto choice and active choice. In the auto choice option, the allocation of assets is done through a pre-specified scheme depending on the subscriber age. For active choice, the investor can decide the allocation of assets. But the investor can make a maximum equities allocation of 50%. NPS mainly invests in equities, corporate bonds and government securities.

Risk ratio:

Both the investment option differs in their exposure to equities and so the risk factor differs accordingly. The NPS scheme mainly invests in corporate bonds, government securities and equities. Investors have the flexibility to choose their own asset allocation as per their risk-taking capability. Else subscribers can also opt for default option where the investments are determined based on the investor’s age which gradually shifts from equity to debt. There are no such options for ELSS investments.

Moreover, ELSS comes with a lock-in of 3-years, in which you can’t touch your money even if the fund is suffering due to market fluctuations. But in case of NPS, you can make 2 switches in asset allocation in a financial year.

Therefore in case of NPS, you can balance the associated risks whereas in case of ELSS the risk cannot make changes to the asset allocation.

Return on Investment:

If we look at the performance of these funds in the last year, then we will find ELSS can give only 4-5% returns while NPS investments have fetched double-digit returns to investors. The reason is ELSS schemes allocate resources under all market caps. Even the most conservative funds have investments in small and midcap stocks.

On the other hand, NPS scheme has a specific allocation mainly in large caps. The market correction of small and mid-cap funds has affected the ELSS returns while large cap investment of NPS equity funds has comparatively fared well in the last year.

However, the scenario may change in the long-run. The risk factor associated with ELSS has the potential to generate extraordinary returns as compared to NPS. Though ELSS can generate higher returns in the long run as compared to NPS investments, the picture may be somewhat different when compared in the short term.

Tax Benefits:

Both the investment options come with tax benefits.

ELSS proves to be the most efficient tax-saving instrument for young investors. Here you can get capital appreciation and tax-free dividends. Capital gains from ELSS are taxed at 10% over an income of 1 lakh.

Subscribers of NPS are eligible to get tax benefits under section 80C. Subscribers can also claim an additional tax benefit of Rs. 50000 under section 80CCD (1B). THE 60% corpus withdrawn at maturity of the scheme remains fully tax-free. However, the remaining 40% amount that will be used to purchase annuity plan will be fully taxed as pension income.

Even though NPS offers a higher tax benefit, ELSS is a better investment option when it comes to wealth creation. However, the choice between both the products fully depends on your investment goals and the tenure for which you want to remain invested.

See Also: Should You Invest in ELSS Beyond the Section 80C Limit?

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