While you are planning for your taxes, one may choose to invest in a variety of investment options to save tax. Section 80C provides a full bouquet of options for the taxpayers to choose from, including the Equity Linked Savings Scheme (ELSS) with a tax benefit of up to Rs. 1.50 lakhs in aggregate for all the options. While this tax benefit available under Section 80C is most commonly known, there are investment avenues available under other sections of the Income Tax Act as well, which provide tax benefits to the investors. One such investment option is available under Section 80CCD(1B) of the Income Tax Act, wherein the investor may make voluntary contributions in National Pension Scheme (NPS) accounts and avail an additional tax benefit for investment up to Rs. 50,000.
Let us make a comparison of NPS vs ELSS to help you know, which is better amongst the two so that the taxpayers may take an informed decision:
Tax Benefit
Investment in ELSS is one of the available investment options under Section 80C, and the investors may avail of a maximum tax benefit for investment up to Rs. 1.50 lakh for investing in ELSS. However, this tax benefit is to be seen in conjunction with the other tax-saving investments made by the taxpayer, including repayment of home loan, contribution to Public Provident Fund account, payment of life insurance premium etc.
On the other hand, contribution to the NPS account is eligible under Section 80CCD, as well as Section 80CCD(1B) of the Income Tax Act. As such, one may avail of an aggregate tax deduction of Rs. 2.00 lakhs by investing in NPS, including the additional Rs. 50,000 tax deduction is available for a voluntary contribution to the NPS account. Further, it is the only eligible investment option for an additional Rs. 50,000 tax benefit.
Lock-in Period
The investments in ELSS carry a lock-in period of 3 years from the date of investment. On the other hand, the fund value under the Tier-1 account of NPS can not be fully withdrawn before the age of 60, even though the fund may be withdrawn partially for certain specific reasons. As such, a low lock-in period of only three years makes ELSS a preferred choice of investment for the investors.
Asset Allocation
Both ELSS, as well as NPS, allow the investor to generate market-linked returns. While the portfolio of ELSS might be predominantly equity-oriented (at least 80%), the allocation of the NPS portfolio under equities, Govt. bonds, and Corporate bonds may be specified separately by the investor. NPS accounts allow the investor to determine manual asset allocation or automatic asset allocation. The auto asset allocation strategy gradually shifts to the debt portfolio as the age increases.
Taxation of Returns
Under ELSS, the investors are liable to pay tax at a flat rate of 10% (plus applicable cess and surcharge) on the long-term capital gains, i.e., the net appreciation from ELSS investment. Further, the taxpayer is eligible for an aggregate exemption of Rs. 1 lakh in a year in respect of long term capital gains from equity shares and equity-oriented mutual funds in aggregate during the year.
On the other hand, the investors under NPS may withdraw portfolio corpus of up to 60% at the age of retirement without payment of tax. In other words, such a commuted fund is tax-exempt in the hands of investors. Further, the investors must purchase an annuity for the balance 40% and the annuity so received will be taxable in the year of receipt.
Linking the Investment with Financial Goals
In line with prudent financial planning, it is recommended that one must link their investments with different financial goals, to be able to track the investment journey in a better manner. Due to the flexibility of investing under ELSS beyond the initial 3-year lock-in period, the investors have the liberty to link their ELSS investments with any of the financial goals maturing after three years or more.
On the other hand, NPS investments are suitable only for retirement planning, as the investors may exit the NPS account only at the retirement age. Further, one needs to mandatorily purchase an annuity for receiving annuity income for the future years for the fund corpus. Linking NPS investments with any other financial goal may not be desirable.
As such, ELSS may be suitable for taxpayers with varied financial goals across their investment journey. However, the taxpayers may also consider NPS investments for additional tax benefits available exclusively for such investment.
Note – The tax provisions, as mentioned in the article, are updated till the Finance (No. 2) Act, 2019 and are only for illustrative purposes. You must consult your tax advisor for more information on your tax planning.
Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2020. Any action taken by you on the basis of the information contained herein is not intended as an offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SAI carefully before taking any decision.
UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services