With the commutation amount becoming tax-free, NPS now is in a position to challenge another popular market-linked tax-saving product – Equity Linked Savings Schemes or ELSS.
People were earlier apprehensive about taking market risks by investing in the National Pension System (NPS), because the maturity amount was taxable. However, with the commutation amount becoming tax-free, NPS now turns out to be a popular choice among individuals. It is now in a position to challenge another popular market-linked tax-saving product – Equity Linked Savings Schemes or ELSS.
Here are the comparisons between NPS and ELSS.
1. Tax incentives on investment amount: While the amounts invested in ELSS are eligible for tax deduction u/s 80C up to Rs 1,50,000 in a financial year, investments in Tier-I Accounts of NPS are eligible for tax deductions u/s 80CCD up to Rs 50,000 over and above the 80C limit. So, Tier-I Accounts of NPS help individuals save more tax than ELSS. Moreover, investments made in Tier-II Accounts of NPS are also made eligible for tax deductions u/s 80C, provided the money invested is kept in the account for at least three years from the date of investment. As the lock-in period for ELSS is also three years, by providing the tax incentives, the government has put NPS directly in line with ELSS. However, investments made in Tier-I Accounts of NPS will be locked till the investor turns 60-year old or retires.
2. Tax incentives on maturity amount: While ELSS investments may be redeemed any time after the completion of three years from the date of purchase of the ELSS units, investments in Tier-I Accounts of NPS may be redeemed only when the investor turns 60 years old or retires. Out of the total maturity amount in Tier-I Accounts of NPS, up to 60 per cent may be commuted at the time of retirement and the remaining 40 per cent has to be invested in a pension plan of an insurance company regulated by the IRDAI. However, amounts invested in Tier-II Accounts of NPS may be taken out after completion of three years from the dates of investments. While the lump sum withdrawals in NPS are totally tax-free, in case of ELSS, 10 per cent Long Term Capital Gain (LTCG) Tax will be charged on such capital gains over Rs 1 lakh in a financial year, taking together all the LTCGs on equity and equity related products.
3. Flexibility: According to your risk appetite, you may chose the proportion of debt and equity you want to keep in your investment portfolio under NPS, along with options to choose your preferred fund manager. However, in ELSS, you may choose only the AMC and the fund before investing and not the ratio of debt and equity in the ELSS scheme. As Tier-II Accounts of NPS and ELSS funds have lock-in period of only three years, you have the option and flexibility to pull your money out whenever market conditions are better. However, in case of Tier-I Accounts of NPS, not only the investments amounts are get locked till you turn 60-year old, but there will be compulsion for you to withdraw the maturity amount at the time of retirement even if the market is at its worst. Moreover, you have to put 40 per cent of the retirement corpus in a pension plan while you retire, even if return on pension plan is at its bottom in that particular year.
So, both NPS and ELSS have some pros and cons, which you should evaluate according to your needs and preferences before making your mind to put your hard-earned money.