The recent changes in norms have suddenly made the National Pension System (NPS) a holistic tax-saving instrument.
The recent changes in norms have suddenly made the National Pension System (NPS) a holistic tax-saving instrument. It is now even posing threat to other popular tax-saving products, be it market-linked or retirement-oriented, such as ELSS and Ulip.
Here is how NPS compares with other popular tax-saving products:
NPS Vs ELSS
Both NPS and equity-linked savings schemes (ELSS) are market-linked products and provide deductions up to Rs 1,50,000 from taxable income in a financial year. While ELSS has a lock-in period of three years, in case of NPS the benefit is available if the amount is not withdrawn from Tier II account before completion of three years from the date of investment. Additional deduction of Rs 50,000 is also available in a financial year u/s 80CCD for investments made in Tier I account of NPS, from which 60 per cent of maturity amount may be commuted tax free on retirement at the age of 60 and the remaining 40 per cent has to be investment in any pension plan of an IRDAI-governed insurance company. In case of ELSS, long-term capital gain (LTCG) tax will be levied if such gain exceeds Rs 1 lakh on redemption, taking together all LTCGs on equities, made in a financial year. Apart from stricter government control and lower expenses, the new favourable tax norms have put NPS in a strong position against ELSS, which faces adverse LTCG norms.
NPS Vs ULIPs
The unit-linked insurance plans (ULIPs) are also a holistic tax-saving product with benefit of deductions u/s 80C as well as tax-free claim amounts, making it an exempt, exempt, exempt (EEE) product. However, while the aim of NPS is to provide retirement benefits, that of ULIP is to provide insurance cover. As both are good tax-saving products, apart from tax savings, a person has to choose one of the products depending on the purpose of investment.
NPS Vs PPF
The Public Provident Fund (PPF) is one of the most popular tax-saving products that fall under the EEE category. Although in the long run, the return on PPF is much lower than market-linked products like ELSS, but apart from sovereign guarantee, PPF also enjoys investment protection, due to which, it can’t be attached under any order or decree of a court in respect of any debt or liability. So, PPF is a risk-free product, while the returns on NPS are subject to market risks.
NPS Vs SSY
The Sukanaya Samriddhi Yojana (SSY) is aimed at providing benefits to girl children that also provides EEE tax benefits. It is also a safe investment option having attractive interest rate, which is even more than that of PPF. So, while legal or natural guardians of girl child may open an SSY account till the child turns 10-year old, NPS accounts may be opened by any person till he or she turns 60-year old.