Tax Benefit On Life Insurance

One of the important aspects of wealth creation and management is tax saving. Although there are many tax-saving investments available in the market, ELSS (Equity linked saving scheme) and NPS (National pension scheme) are most preferred due to their flexible plans. However, the purpose and schemes of these two options are totally different from each other. Investments in both ELSS and NPS are tax deductible up to a limit of 1.5 lakhs under the income tax act, 1960 under section 80C. Hence, the ultimate aim of tax saving can be achieved by both investments. But who can invest in which option is a question? Let’s look in detail at NPS and ELSS in the blog below. 

Table of Contents

What is NPS?

NPS or National Pension System is a government scheme for all employees from the public as well as the private sector. This is a voluntary contribution made by the employee. NPS holders are offered two types of accounts, i.e. Tier I and Tier II accounts. Employers can also contribute to employees NPS and the contributions are tax deductible.  

The Tier I account is mandatory and is a basic requirement of an NPS account. Meanwhile, Tier II accounts are completely voluntary. Moreover, Tier I accounts have a lock-in period until the retirement age of the investor. Tier I accounts are compulsory for opening Tier II accounts. However, Tier II accounts do not have any lock-in period or withdrawal restrictions. 

National Pension System is locked-in until retirement or until you reach the age of 60, whichever comes later. Early exit from NPS is also possible with Tier 2 accounts. Likewise, the minimum annual contribution required for a Tier-I account is Rs. 1000, and Rs. 250 for a Tier-II account. 

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However, the returns and profits are based on market trends. As mentioned above, NPS investors are eligible for tax benefits of Rs. 1.5 lakh under Section 80C of the Income tax act, 1960. Investments in NPS are made in equity, corporate debt, government securities, and alternate investment funds. But the funds can be withdrawn within a specific limit and under the condition of purchasing an annuity. 60% of the corpus withdrawn in a lump sum is exempt from taxThe balance of 40 percent of the corpus would have to be compulsorily used to buy an annuity plan. The annuity received is taxable in the year of receipt. as per your applicable tax rate.

Benefits of NPS: 

Portability: NPS is very easy in terms of portability. NPS offers hassle-free arrangements for individuals upon moving to a new job. 

Regulation: NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is regularly monitored by the NPS trust.   

What is ELSS?

ELSS or Equity Linked Savings Scheme is one type of mutual fund with a 3-year lock-in period. This is the only mutual fund with a lock-in period. Like any other mutual fund, you can contribute to ELSS as a lump sum or SIP. Since it is a mutual fund, ELSS has the added advantage of diversification. However, the investments are made only in the equities in ELSS. Transparency is higher in ELSS as the asset allocation is made available to the investors. 

ELSS usually requires a minimum investment of Rs. 500 as lumpsum or SIP. Similar to NPS, returns and profits are market-linked. ELSS investors are eligible for tax benefits of Rs. 1.5 lakh under Section 80C of the Income tax act, 1960. However, a majority of the investment in ELSS is invested in equity stocks. For all equity mutual funds, including ELSS, an LTCG tax at 10% is payable if the total long-term capital gains amount from equity-oriented mutual funds/ equity shares exceed ₹1,00,000 in a year.

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Who can invest in what?

There are a lot of criteria to be considered before investing in any plans. Be clear in your goal. Make sure you understand your financial goals clearly. You should always know what you are saving for. To have a clear head about your investment goals as long term, short term and immediate needs is very essential in making financial decisions. For long term investors, NPS might benefit a lot. But for short term investors, it is better to invest in ELSS. 

As long as diversification is concerned, ELSS invests more than 95% in the equities. This might be of great value for wealth creation for investors. On the other hand, NPS invests around 75% in equities and the rest in debt and other instruments. This proves to be a better investment for a secured future. Hence, in the investment world, one solution can never satisfy everyone’s need. Therefore, always contact an investment coach to define your goals, risk potential and time horizon more clearly to make an informed decision.


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