An Equity Linked Saving Scheme (ELSS) is a mutual fund scheme that qualifies for tax deduction. An investor can invest in an ELSS and claim a tax deduction of up to Rs 1.5 lakh. One can withdraw money after completion of 3 years Lock-in-period.
Benefits:
1. Save on taxes: You can claim a deduction on your income for the amount you invest in this. By fully investing Rs. 1, 50,000, you can save up to Rs. 46,350* on taxes.
2. Superior return: ELSS invests the maximum amount of money in equities i.e., 80-95% irrespective of your age. Over the long term, equity is the best asset class for generating inflation-beating returns.
3. Tax free gains: Capital gains or dividends earned in financial year on ELSS are tax-free. Also in ELSS scheme, investor didn’t need to pay any tax while withdrawing his money.
4. Better liquidity: An ELSS investment will be locked in for three years. Beyond this, you can redeem part or whole of your ELSS at any time.
5. Better Flexibility: ELSS offers the option to use SIP (Systematic Investment Plan), where you can invest small amounts every month. This is beneficial as it allows you to invest even if you are short on funds initially. In fact, you can start with as low as INR 500.
Disadvantages:
1. Under ELSS you need to select your fund option on your own. You have to be careful while making fund selection otherwise you will end up making losses.
2. ELSS is risky investment option as a majority of investment is made in equity.
NPS: A National Pension System (NPS), on the other, is a government-sponsored pension scheme that allows employees and self-employed persons to invest in it and claim tax deduction of up to Rs 1.5 lakh. NPS also qualifies for additional tax benefit of Rs 50,000.
However, investors can withdraw from NPS only at the time of retirement at 60. But in the case of child education, marriage, construction or purchase of a house, a critical disease of self or dependent family members, the subscriber is eligible for withdrawal only up to 25% of his own contribution.
Benefits:
1. NPS offers additional tax benefit of Rs.50000 under section 80 CCD(1B) apart from 80 C.
2. NPS is backed by the government of India.
3. Average charges applicable on NPS is very low.
Disadvantages:
1. Lower returns: NPS invests maximum 50% of the money into equities and maximum 90% in debt or Government securities according to age or Risk Profile. Debt has lower returns than equity in long term.
2. Less liquidity: The NPS is locked in until you reach 60 years of age, and allows conditional withdrawal.
3. Taxation: NPS on maturity is tax-free up to 40% of the total corpus accumulated and the remaining 60% is taxable.
4. Annuity: In NPS at least 40% of the total amount accumulated has to be used for purchasing annuities.
5. Minimum investment required: Under NPS you need to make a minimum contribution of Rs.6000 every year. This contribution is required till 60 years age.
Wrap up: NPS is very good long term investment option backed by the government. However, return offered by NPS is limited as equity exposure is limited by 50%. NPS also has limitation of annuity and lock in period.
Therefore, I recommend ELSS for investment. The dual benefits of tax saving and equity exposure make ELSS an attractive option for investment. You have full freedom for the fund selection. You can withdraw money any time after 3 years. No tax is applicable at the withdrawal. As equity exposure of ELSS is high, ELSS is expected to give better return compare to NPS.
Low return and withdrawal imitation make NPS less attractive option.
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