India Markets open in 7 hrs 47 mins

Mutual fund ELSS vs NPS: Watch out before you commit; these significant differences can impact you

Amitava Chakrabarty
National Pension System, NPS, New Pension Scheme, Equity-Linked Savings Scheme, ELSS, Mutual fund ELSS vs NPS, difference between NPS and ELSS, NPS Tier-I Account, NPS Tier-II Account, NPS partial withdrawal, retirement corpus

Both the National Pension System (NPS) and Equity-Linked Savings Scheme (ELSS) are market-linked products that are aimed at creating long-term wealth for investors. While ELSS is a voluntary investment scheme, NPS was originally launched to replace the conventional government pension system and is compulsory for government employees, who joined their services on or after January 1, 2004. Currently, government employees compulsorily contribute 10 per cent of their basic salary to NPS, while the government also makes a matching contribution.

However, from May 2009, NPS was made available for common public, and anyone between 18 and 60 years of age may now voluntarily contribute to the scheme. Moreover, investors will also get tax deductions up to Rs 50,000 u/s 80CCD (1B) in a financial year on voluntary contributions, which is over an above the Rs 1,50,000 investment limit u/s 80C.

Even as both ELSS and NPS are market-linked products, but there are some significant differences, which can impact you. So, you should go through the following differences in the two products before you commit to invest.

Purpose

Although both the products are aimed at long-term wealth creation, but NPS especially the Tier-I Account is specifically designed to provide pension to the contributors.

Minimum and maximum investment

While, there are no restrictions on minimum and maximum investments in ELSS, in case of NPS, the minimum investment needed per year to keep Tier-I and Tier-II Accounts active are Rs 6,000 and Rs 2,000 respectively. Moreover, the minimum contribution per transaction is Rs 500 for Tier-I Accounts and Rs 250 for Tier-II Accounts. If the minimum amount is not paid in a year, the accounts will get frozen and in order to unfreeze an account, the customer has to pay the total of minimum contributions for the period of freeze, the minimum contribution for the year in which the account is reactivated and a penalty of Rs 100.

Tax benefits on investments

Investors may get deductions up to Rs 1,50,000 from their taxable income u/s 80C on investments made in ELSS in a financial year. Government employees also get tax benefits up to Rs 1,50,000 u/s 80CCD(1) on compulsory contributions that are deducted from their salary. However, voluntarily contributions entail investors deductions up to Rs 50,000 u/s 80CCD (1B) in a financial year, which is over an above the section 80C limit.

Proposal is there to provide 80C benefits to government employees on contributions to Tier-II Accounts, provided the money invested is kept in the account for at least three years from the date of investment.

Flexibility

While you may chose the proportion of debt and equity you want to keep in your investment portfolio according to your risk appetite under NPS, along with options to choose your preferred fund manager, in ELSS, you may choose only the AMC and the fund before investing and not the ratio of debt and equity in the ELSS scheme.

Lock-in period

While ELSS has a lock-in period of three years, investments made in Tier-I account of NPS mature at the time of retirement, when a person becomes 60 years old. However, maximum three partial withdrawals with up to 25 per cent of self contributions per withdrawal are allowed from NPS Tier-I Accounts for specific purposes after three years from opening an account. In case of investments made in Tier-II Accounts of NPS, there is no lock-in period.

Withdrawal provisions

In case of ELSS, there is no restriction on withdrawal once the lock-in period is over. Also, there is no restriction on withdrawal from Tier-II Accounts. But subscribers may withdraw up to 60 per cent of the maturity amount or retirement corpus from Tier-I Account in lump sum at the time of retirement at the age of 60 years and the remaining minimum 40 per cent amount must be used to purchase annuity plans from any IRDA-regulated insurance company. However, in case a subscriber retires before the age of 60, he/she has to compulsorily use 80 per cent of the retirement corpus to purchase annuity plans.

Taxation of withdrawal amount

While long-term capital gain (LTCG) tax will be levied if such gain on ELSS exceeds Rs 1 lakh on redemption taking together all LTCGs on equities made in a financial year, lump sum withdrawals up to 60 per cent of the retirement corpus from NPS Tier-I Accounts at the time of retirement at the age of 60 are tax free. Partial withdrawal up to 25 per cent of subscriber’s contribution in Tier-I NPS Account is exempted from tax.

Conclusion

While NPS provides more choice at the time of investment, it also binds the subscribers for longer period. Although, ELSS provides investors full control of the maturity amount, NPS offers higher tax benefits on maturity.

So, both ELSS and NPS has pros and cons, which you should look into before choosing your cup of tea.