ELSS vs NPS for Tax Saving

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ELSS or NPS? Suggested Allocation 80-100%

Equity investments, if chosen judiciously, can make your wealth grow faster by beating inflation than most of the investments and lower your tax burden. ELSS (Equity Linked Savings Scheme) & NPS (National Pension Scheme) are such two schemes.

 

ELSS invests primarily in equity shares of companies. It is an equity diversified fund which provides the benefits of capital appreciation, as well as tax benefits. It has a lock in period of 3 years with tax free dividends and capital gains.

The main risk with ELSS is that it has a considerable equity exposure (usually 80% of the total amount is invested in the equity with remaining 20% invested in bonds, debentures, Government securities etc.) and the returns are linked to market returns.

NPS is a pension scheme, which not only provides good cost adjusted returns and tax saving but also plans for your retirement. The investor has the flexibility to decide the percentage of the corpus which should be allocated for equity, corporate bonds and government securities, with the only limitation being the 50% cap on exposure to equity. One of the most outstanding features of NPS is the 'lifecycle fund', under which the equity exposure is decided by investor's age. 50% allocation to equity is reduced every year by 2% after the investor turns 35, till it comes down to 10%. This is in line with the strategy to opt for a 'higher-risk higher-return' portfolio mix early in life, when there is ample time to make up for any possible black swan event.

 

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