BackELSS or NPS - a better tax saver? Experts say it depends on your IT bracket
ELSS is a better product for wealth creation and also if you have liquidity issues. NPS is a great retirement toolBut for saving tax, you have to choose the product as per your income tax bracket
PremiumELSS and NPS are two different products with completely two different purposes but when it's time to decide where to invest we are often at two minds. This is simply because these are both equity-linked products that qualify for deduction u/s 80C of the IT Act. So how do you decide on the dilemma?
Be clear in your head what you are saving for.
To be clear-headed about your investment goal- i.e. short-term, mid-term or long-term goal or tax-saving, etc. - is half the battle won.
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For example, if you are planning to save taxes and have liquidity then "Beyond doubt, I find ELSS es much more sensible," says Abaneeta Chakraborty of Abanwill Consultants LLP.
In ELSS, after a lockin period of 3 years, the funds are available to you. In NPS, one has to figure out if one can do any premature withdrawals and there are conditions. Else at the age of 60, 60% of the corpus can be withdrawn tax-free but 40% has to be compulsorily taken as a taxable annuity.
Plus, ELSS funds are also better suited for long-term wealth creation, points out personal finance coach and Youtuber Paritosh Sharma: They are pure equity funds and remain invested almost up to 95-100% in equities over the long run.
On the other hand, the NPS investors cannot have more than 75% equity in their NPS portfolio allocation and the rest is in debt. Also, such a level of equity allocation is available only to people who are under the age of 35 and if they choose the NPS Active choice. As the years' pass, this limit gradually reduces by a few percentage points every year. So technically speaking NPS can never match the equity allocation of ELSS Funds.
So it can be said since equity is a long-term product, it can therefore be said that being a pure equity product ELSS can give better returns than NPS.
Further explaining the technicalities, Abaneeta says at the time of investing in ELSS, one knows one is investing in Equity and the tax structure. While doing an NPS however, the investor has to first choose the pension fund manager, then choose the asset allocation. In the allocation, there is an auto mode where equity allocation changes with the age – that model is debatable. And there is an active mode, where one needs to choose a mix of asset -classes. So that is 2 choices to make and a whole new KYC process.
The more choices the customer needs to make, the more the inertia. In behavioral finance, multiple steps to understand and enroll are called “Sludges" and we must get rid of them.
Renu Maheshwari, SEBI registered investment advisor, CEO, and principal advisor at Finzscholarz Wealth Managers LLP, meanwhile, strongly recommend NPS as a retirement tool.
NPS is an excellent retirement tool unless there is a liquidity issue she says adding: Plus, NPS also qualifies for an additional benefit of Rs. 50,000/- u/s 80 CCD(1B). This is over and above the deduction under 80C. Asset allocation for NPS can differ from person to person depending upon his/her age and stage of life.
Which is a better tax-saving option?
While deciding upon what is the best option to save taxes u/s 80 C, the investor should go back to the fundamentals of risk profile, financial goals and asset allocation.
If the allocation demands investing in equity we consider NPS and ELSS. If the client is in a lower-income/tax bracket and needs liquidity in the medium term, we recommend ELSS. If the client does not need liquidity in the medium to long term we recommend NPS, Maheswari opines.
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