3 mins read
23-Aug-2024
Equity-linked savings schemes, or ELSS, invest in shares, equities, and stocks to earn higher returns from the market while taking on high market risk whereas NPS, or National Pension System, is a voluntary investment scheme that allows individuals to make a disciplined long-term savings plan to secure their future and receive pension returns later in life.
In this article, we will understand the difference between NPS vs. ELSS; ELSS vs. NPS–which is better; their past performances, and which one you should opt for.
It is a voluntary scheme that comes with a long-term maturity and can be opted for by everyone, including private employees, government servants, and individuals from the unorganised sectors.
It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and allows individuals to withdraw a specific percentage of their surplus corpus on retirement. The remaining amount can be invested in an annuity, which gives the individuals a certain amount as a pension every month after retirement.
The National Pension System gives you access to two accounts: Tier I and Tier II. The Tier I account is a compulsory and basic form of the NPS account that has a fixed lock-in period until the individual's retirement. Tier II accounts are voluntary in nature and do not have any withdrawal restrictions or a lock-in period.
When it comes to taxation benefits, investment in NPS is eligible for tax deductions up to an amount of Rs. 1.5 lakhs under Section 80C of the Income Tax Act of 1961. An individual can also qualify for additional deductions up to Rs. 50,000 if they satisfy the conditions stated under Section 80 CCD of the Income Tax Act of 1961.
An ELSS is an open-ended fund that saves taxes for individuals by investing in equities of businesses and equity-related financial instruments. The returns generated by an ELSS scheme are related to market movements. Hence, they do not guarantee any fixed returns. However, in recent years, ELSS has become a popular choice of investment among individuals since they have been generating better returns in comparison to other traditional modes of investment. If you are looking at a long-term horizon for your investment, the ELSS scheme makes for a suitable choice.
ELSS funds come with the lowest lock-in period in comparison to other tax-saving options. They give investors a chance to easily diversify their portfolio by starting investment plans for as low as Rs. 500 per month. Similar to NPS, ELSS schemes allow individuals to claim deductions up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act of 1961.
These funds are under the management of a fund manager who actively manages the portfolios to deliver good returns in the long run.
However, they do have certain differentiators, such as:
ELSS schemes mainly invest in either stocks, equities, or equity-linked instruments that come with high risks but also have the potential to deliver high returns.
ELSS schemes, on the other hand, have a lock-in period of only three years, which offers individuals the flexibility to take care of any short or medium-term goals.
ELSS schemes invest in high-risk, high-reward equities to maximise the return potential for their investors, allowing them to build greater wealth with time.
For NPS, when the investment matures at the time of retirement, the individual can get access to 60% of the corpus tax-free, while the remaining 40% of the corpus must be invested to buy an annuity plan.
In the case of ELSS schemes, once the investment matures after the lock-in period of three years, it can be withdrawn tax-free up to a certain limit.
ELSS funds, as discussed earlier, are fully accessible after the lock-in period of three years is over.
ELSS schemes are fairly flexible as they allow you the freedom to manage your investments and choose the fund option that aligns with your financial goals and suits your risk appetite.
Explore these related articles to deepen your understanding and make informed investment decisions:
NPS is known to deliver steady returns and can be reassuring for conservative investors, while ELSS has a higher growth potential and high risk. Both these instruments have outperformed most of the traditional tax-saving instruments like FDs and PPFs over time.
ELSS funds offer a higher return over NPS in both the short and long term. They also have a shorter lock-in period of only three years, and your ELSS investment is eligible for tax exemptions under Section 80C.
Investing through NPS can be preferred if you set long-term goals like retirement planning. NPS offers safe and stable returns but comes with a long lock-in period. Investments under NPS also qualify for tax deductions.
Both NPS and ELSS offer substantial tax benefits under Section 80C, enhancing their appeal as tax-saving investments. Ultimately, the right choice hinges on your unique financial needs and goals.
Whether you are leaning towards the stability of NPS or the high-growth potential of ELSS, the Bajaj Finserv Mutual Fund Platform offers a comprehensive suite of mutual fund schemes tailored to meet your financial goals. Explore the Bajaj Finserv Platform today to find the perfect investment solution for securing your financial future.
In this article, we will understand the difference between NPS vs. ELSS; ELSS vs. NPS–which is better; their past performances, and which one you should opt for.
What is NPS?
The National Pension System is a form of social security initiative managed by the Central Government to encourage individuals to save for their retirement and build a large corpus for their old age.It is a voluntary scheme that comes with a long-term maturity and can be opted for by everyone, including private employees, government servants, and individuals from the unorganised sectors.
It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and allows individuals to withdraw a specific percentage of their surplus corpus on retirement. The remaining amount can be invested in an annuity, which gives the individuals a certain amount as a pension every month after retirement.
The National Pension System gives you access to two accounts: Tier I and Tier II. The Tier I account is a compulsory and basic form of the NPS account that has a fixed lock-in period until the individual's retirement. Tier II accounts are voluntary in nature and do not have any withdrawal restrictions or a lock-in period.
When it comes to taxation benefits, investment in NPS is eligible for tax deductions up to an amount of Rs. 1.5 lakhs under Section 80C of the Income Tax Act of 1961. An individual can also qualify for additional deductions up to Rs. 50,000 if they satisfy the conditions stated under Section 80 CCD of the Income Tax Act of 1961.
What is ELSS?
Equity linked savings schemes (ELSS) are mutual fund schemes that were introduced to help individuals save taxes and create long-term wealth through equities.An ELSS is an open-ended fund that saves taxes for individuals by investing in equities of businesses and equity-related financial instruments. The returns generated by an ELSS scheme are related to market movements. Hence, they do not guarantee any fixed returns. However, in recent years, ELSS has become a popular choice of investment among individuals since they have been generating better returns in comparison to other traditional modes of investment. If you are looking at a long-term horizon for your investment, the ELSS scheme makes for a suitable choice.
ELSS funds come with the lowest lock-in period in comparison to other tax-saving options. They give investors a chance to easily diversify their portfolio by starting investment plans for as low as Rs. 500 per month. Similar to NPS, ELSS schemes allow individuals to claim deductions up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act of 1961.
Difference between NPS vs ELSS
NPS and ELSS have similar investing methods. Both these instruments pool money from their investors and then invest it in different assets on behalf of the investor.These funds are under the management of a fund manager who actively manages the portfolios to deliver good returns in the long run.
However, they do have certain differentiators, such as:
1. Investment type
NPS invests in a diverse asset class mix, which includes equities, government and corporate bonds, and other stocks, to get the benefits of a well-diversified portfolio.ELSS schemes mainly invest in either stocks, equities, or equity-linked instruments that come with high risks but also have the potential to deliver high returns.
2. Lock-in period
The National Pension System has a longer lock-in period, extending till the age of retirement of the individual, and focuses on encouraging a disciplined approach to build a long-term stable corpus of funds.ELSS schemes, on the other hand, have a lock-in period of only three years, which offers individuals the flexibility to take care of any short or medium-term goals.
3. Risk and returns
Since NPS invests in different asset classes to spread its risk, it is considered to be more stable but offers lower returns to the investor over time.ELSS schemes invest in high-risk, high-reward equities to maximise the return potential for their investors, allowing them to build greater wealth with time.
4. Tax benefits
Both these schemes offer tax benefits to investors to reduce their taxable income, which falls under Section 80C of the Income Tax Act.For NPS, when the investment matures at the time of retirement, the individual can get access to 60% of the corpus tax-free, while the remaining 40% of the corpus must be invested to buy an annuity plan.
In the case of ELSS schemes, once the investment matures after the lock-in period of three years, it can be withdrawn tax-free up to a certain limit.
5. Withdrawals
Withdrawals from the National Pension System are only partial after a specified lock-in period is over. This gives the individual a certain amount of flexibility in utilising their fund while ensuring that a dedicated portion of the corpus is being saved for retirement income in the form of an annuity.ELSS funds, as discussed earlier, are fully accessible after the lock-in period of three years is over.
6. Control and flexibility
NPS schemes have more constraints and restrictions compared to ELSS. NPS has more stringent rules on withdrawals; its emphasis lies more on long-term capital preservation and mandatory purchase of annuity post-retirement.ELSS schemes are fairly flexible as they allow you the freedom to manage your investments and choose the fund option that aligns with your financial goals and suits your risk appetite.
Explore these related articles to deepen your understanding and make informed investment decisions:
Which is better between ELSS vs NPS?
When it comes to ELSS vs NPS comparison, there is no one-size-fits-all approach you can take. You should always keep in mind your individual financial goals, risk tolerance, and maturity horizons before investing in either of the two instruments.- If your aim is to have a significant corpus for your retirement, NPS seems more appropriate since it has a longer horizon and focuses on delivering a substantial corpus at the time of your retirement. It also mandates an annuity, which will provide you with a consistent income after retirement.
- If you do not want to play it safe, need higher returns, and are willing to take on more risk, ELSS schemes will be a more favourable choice to park your money.
- ELSS schemes also provide you with significant tax advantages since they are non-taxable when withdrawn up to a certain limit.
- When it comes to liquidity, ELSS schemes emerge as a better option since they are highly accessible once the brief lock-in period is over, but the same is not true for NPS.
- If you want more diversification for your investments, NPS will align more with this goal as its asset allocation is more diverse than ELSS, which is solely focused on equity. NPS gives you a more balanced and diversified portfolio.
How does the performance of NPS vs ELSS compare over the years?
Analysing the historical performance of ELSS vs. NPS provides investors with valuable insights into their trends, helping them determine which scheme aligns better with their financial goals.NPS performance
- These funds have provided stable and moderate returns over the past several years.
- The average return of these funds has been 10-12% annually over the last 10 years.
- Since the approach of these funds is conservative, it does not see any major swings during market fluctuations.
ELSS performance
- ELSS funds primarily invest in equities. Hence, they might generate higher returns if conditions remain favourable.
- ELSS funds that are top performers have provided annual returns of 15-18% over time.
- However, since these are closely linked to the market, they can see a huge drop in value when the market is going through a downturn.
NPS is known to deliver steady returns and can be reassuring for conservative investors, while ELSS has a higher growth potential and high risk. Both these instruments have outperformed most of the traditional tax-saving instruments like FDs and PPFs over time.
Key takeaways
The first thing to consider before investing in any scheme is analysing your financial objectives, goals, and maturity horizons and whether you will be able to absorb the risk accompanying your choice of investment.ELSS funds offer a higher return over NPS in both the short and long term. They also have a shorter lock-in period of only three years, and your ELSS investment is eligible for tax exemptions under Section 80C.
Investing through NPS can be preferred if you set long-term goals like retirement planning. NPS offers safe and stable returns but comes with a long lock-in period. Investments under NPS also qualify for tax deductions.
Conclusion
Comparing NPS vs. ELSS requires a careful assessment of your financial aspirations, risk tolerance, and investment timeline. NPS stands out as a robust option for those aiming for a disciplined, long-term retirement plan with steady returns and lower risk. Conversely, ELSS shines with its potential for higher returns, greater liquidity, and shorter lock-in period, catering to investors with a higher risk appetite and shorter investment horizon.Both NPS and ELSS offer substantial tax benefits under Section 80C, enhancing their appeal as tax-saving investments. Ultimately, the right choice hinges on your unique financial needs and goals.
Whether you are leaning towards the stability of NPS or the high-growth potential of ELSS, the Bajaj Finserv Mutual Fund Platform offers a comprehensive suite of mutual fund schemes tailored to meet your financial goals. Explore the Bajaj Finserv Platform today to find the perfect investment solution for securing your financial future.
