NPS vs ELSS

The National Pension System (NPS) is a social security programme backed by the Central Government in India. It is a retirement savings scheme with a long-term investment horizon. The Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government regulate it. You can join the scheme if you are an Indian citizen between 18 and 70 years old.

Under the scheme, your money is invested in different assets, including equity, corporate debt, government securities, etc. The equity exposure is currently capped at 50% - 75%. It gradually decreases as you age, aligning with your risk profile.

You can withdraw a portion of your savings as a lump sum upon retirement. However, the remaining must be used to purchase an annuity. However, according to the new rules, the entire corpus can be withdrawn if it is less than or equal to ₹5 lakhs.

The two accounts under the NPS include Tier I and Tier II. The Tier I account is the basic NPS account and is mandatory. It has a lock-in period until your retirement. The Tier II account is voluntary. It does not have any lock-in period or withdrawal restrictions. However, you can open a Tier II account only when you have a Tier I account.

Tax benefits are available under Section 80C of the Indian Income Tax Act for the money invested in Tier I.

The Equity Linked Savings Scheme (ELSS) is another efficient tax-saving instrument. It is an open-ended mutual fund programme that invests at least 80% of the corpus in equity instruments.

ELSS ensures diversification across different sectors, market capitalisations, and themes. The fund managers conduct extensive research before picking stocks to optimise long-term wealth appreciation.

The returns from ELSS are market-linked and, therefore, not guaranteed or fixed. However, investing in the scheme can give higher returns in the long run.

It has a 3-year lock-in period, which is relatively shorter than other tax-saving options. The fund does not have any maximum tenure.

NPS and ELSS are efficient tools to achieve your financial goals. Both pool money from investors and invest according to predetermined asset allocation. Professional fund managers manage the portfolio and strive to accelerate wealth creation.

Here is a quick comparison between the two schemes to know their key differences:

NPS is one of the most popular tools to ensure financial security post-retirement. It is a great choice if you have a low-risk appetite and wish to save regularly for retirement. There is also a potential to earn higher returns since a part of your corpus is invested in equities.

You can also change the fund manager if dissatisfied with the fund's performance. The scheme also allows you to save on taxes. You can enjoy tax deductions of up to ₹2 lakhs under Sections 80C and 80CCD (1B) of the Income Tax Act, 1961.

So, is NPS worth investing in? Yes. It is a worthy investment tool to ensure a secure and stable old age. If your income comes under a high tax-paying slab, NPS can significantly reduce your tax outgo. However, evaluate your financial goals, cost of living and risk tolerance before investing.

ELSS is suitable if you aim to earn higher returns and save on taxes under Section 80C of the Income Tax Act. However, the scheme involves higher market risks since most of your money is invested in equities. So, go ahead only if you have a high-risk tolerance.

Investing in ELSS can help you generate better returns over time than many other traditional tax-saving instruments. Also, it offers greater liquidity than NPS. You can extend or liquidate your account after the lock-in period ends.

NPS and ELSS are robust investment tools for achieving financial goals. NPS is ideal for long-term goals such as retirement planning. It allows you to invest regularly and generate stable returns while saving on taxes.

However, the scheme comes with a lock period until 60 years of age or retirement, whichever is earlier.

On the other hand, ELSS is a good option to fulfil your short or long-term goals. It can generate higher returns than NPS while helping you save on taxes. Also, the lock-in period for the scheme is shorter than other tax savings tools.

However, it is crucial to evaluate your financial goals, risk appetite, and investment horizon before investing in any scheme. Make sure the scheme and its returns align with your requirements.

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