Know the difference between NPS and ELSS

When it comes to planning for the future, financial instruments play a crucial role in securing our goals. Among the plethora of options available in the market, the National Pension System (NPS) and Equity Linked Savings Scheme (ELSS) stand out as popular choices for different reasons. Let’s delve into them to understand which might be the better fit for your financial objectives.

What is NPS?

NPS is a government-backed retirement savings scheme. Here are some key features of NPS:

• Long-term retirement planning: NPS is primarily aimed at providing a corpus for retirement. It allows you to invest in both equity and debt and build a corpus during your working years. Since a part of this corpus is compulsorily used to invest in annuity , it ensures a regular income and financial security during the post-retirement period.
• Tax benefits: Contributions made to NPS are eligible for tax deductions under Section 80CCD (1) of the Income Tax Act, up to a limit of ₹1.5 lakh per financial year. Over and above this Rs 1.5 lakh, you can also claim an additional deduction up to Rs 50,000 by investing in Tier I NPS account under Section 80CCD (1B).

What is ELSS?

Equity Linked Savings Scheme or ELSS is a type of Mutual Fund investment that primarily invests in equity and equity-related instruments. Key features of ELSS include:

1. Tax benefits: ELSS investments qualify for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per annum. This makes ELSS a popular choice for tax-saving purposes.

2. Higher potential returns: Owing to their equity exposure, ELSS funds have the potential to generate higher returns compared to traditional tax-saving instruments like PPF or FDs over the long term.

ELSS vs NPS - Why you should invest in both

NPS and ELSS address different financial goals. Here’s a comparative overview:

• Long-term retirement planning: If your primary objective is retirement planning with a steady income stream post-retirement, NPS offers a structured approach with tax benefits.
• Tax-saving and wealth creation: ELSS can serve dual purposes of tax-saving under Section 80C and wealth creation through equity exposure.
• Risk appetite: NPS, with its diversified asset allocation and gradual shift to safer instruments as retirement approaches, may be more suitable for conservative investors. ELSS, with its higher equity exposure, may be preferred by investors who are more comfortable with market volatility.

Also Read: How to invest in NPS (National Pension System)?

Conclusion

Are you confused about investing in NPS vs ELSS? Both NPS and ELSS allow Systematic Investment Plans (SIPs), which enable regular and disciplined investing. Investing in SIPs in NPS can help accumulate a retirement corpus systematically, while SIPs in ELSS funds can harness the power of compounding over the long term. While NPS is tailored for retirement planning with tax benefits, ELSS offers tax-saving opportunities coupled with potential wealth creation through equity investments. Explore both these offerings and embark on a journey towards achieving your financial goals with confidence.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.