ELSS vs PPF vs NPS: Which is the Better Tax-Saving Investment?

Let’s understand some of the key features of this tax-saving investment option:

• ELSS mutual funds come with a mandatory lock-in window of 3 years, which is the shortest lock-in period for tax-saving investments in India.

• ELSS funds are the only tax-saving MF schemes available in India.

• You can invest in an ELSS fund both via SIPs or by making lump-sum contributions.

• While ELSS funds may have potential for better long-term returns, they also carry very high market risks.

Tax Benefits of ELSS Mutual Funds

The principal you invest into an ELSS fund qualifies for tax deductions up to Rs. 1.5 Lakhs under Section 80C of the Income Tax Act. This deduction is available under the old regime and falls within the overall Section 80C limit. 

Moreover, the deduction benefits of this tax-saving scheme is applicable only on the principal, not the interest earned.  

The National Pension System or NPS is a government-backed retirement-focused savings scheme that invests in a mix of equities, corporate debt, government securities, and alternative investment funds. NPS is a market-linked scheme and is regulated by the Pension Fund Regulatory and Development Authority (PFDRA). 

• Any Indian citizen aged between 18-70 years can invest in this tax-saving scheme.

• Your invest is locked-in until you reach 60 years of age, but premature withdrawals are allowed.

• You can make partial withdrawals of up to 25% after 3 years of being a member for specific purposes such as your child’s marriage, child’s higher education, construction of a house, or medical treatment of specific diseases.

• The NPS Tier I account is the mandatory retirement account with withdrawal restrictions, while Tier II accounts are voluntary accounts without any withdrawal restrictions.

• You can choose between Active Choice and Auto Choice investment options while investing in this tax-saving scheme. 

• The Active Choice option let’s you decide your own asset allocation (keep equity allocations to a maximum of 75%). But you can allocate up to 100% into government securities and corporate debt. 

• Auto Choice option takes a lifecycle approach to automatically decide your asset allocation based on your age, but you can still choose from aggressive, moderate, and conservative asset allocation options.

• Once you turn 60 or reach superannuation age, you can withdraw up to 60% of your corpus tax-free as a lump-sum. 

• The remaining 40% of your corpus from this tax-saving investment has to be used to purchase an annuity. 

   

Tax Benefits of NPS

Contributions made to your NPS account qualify for tax deductions of up to Rs. 1.5 Lakh/financial year under the Section 80C limit. Apart from that, you also get an additional tax benefit of Rs. 50,000 under Section 80CCD (1B) for this tax-saving scheme. Moreover, only investments in Tier I accounts qualify for tax deductions. 

Other than that, NPS also qualifies as an EEE - Exempt, Exempt, Exempt tax-saving investment. This means that the contributions, accumulations, and withdrawals qualify for tax exemptions. But the pension income from the annuity purchased is taxable.

Public Provident Fund or PPF is another government-backed long-term savings scheme. PPF is known for capital safety and reliable returns because this tax-saving scheme is backed by government. Interest calculations on Public Provident Fund investments depend on the interest rate offered by the Indian government. 

• You can start investing in this tax-saving scheme with a minimum investment of Rs. 500/year. The maximum limit is Rs. 1.5 Lakhs.

• PPF has a long lock-in tenure of 15 years.

• Partial withdrawals are allowed from the 7th year of investment. Loans against PPF are available from the 3rd to the 6th investment year.

• You earn fixed and assured returns because this tax-saving investment carries sovereign guarantee. 

• PPF interest rates are reviewed quarterly by the Ministry of Finance, with interest being calculated on a monthly basis and credited annually.

Tax Benefits of PPF

As per PPF taxation rules, the scheme falls under the EEE category. This means that you can claim tax deductions of up to Rs. 1.5 Lakhs under Section 80C on annual contributions to the account, the interest earned on the investment is tax-free, and the maturity corpus is also tax exempt. 

If you’re still confused about how ELSS funds, NPS, and PPF compare in terms of tax benefits, the following table may help. It sums up the key differences between ELSS, PPF, and NPS as tax-saving investments to make things clearer:
 

So, Which Tax-Saving Investment to Choose?

Choosing a tax-saving scheme for investment doesn’t just mean comparing tax benefits. You also have to review other factors like lock-in periods, return potential, and fit with your goals and risk tolerance. 

So, if you’re still on the fence about choosing the right tax-saving investment for your portfolio, here’s a table that sums up the differences between ELSS, PPF, and NPS to help you make an informed choice:
 

You May Choose ELSS Funds If:

• You want a higher return potential.

• You have a very high risk appetite and can tolerate potentially high market volatility.

• You prefer a shorter lock-in period.

• Your goal is long-term potential wealth creation.

You May Choose NPS If:

• You are focused on retirement planning.

• You are comfortable with limited liquidity.

• You can stay invested until retirement to get all the benefits of this tax-saving scheme.

You May Choose PPF If:

• You prefer capital safety and relatively modest, but guaranteed returns.

• You have a low risk appetite.

• You are prepared to stay invested for 15 years.

• You are planning for long-term goals.

So, when it comes to selecting the right tax-saving investment option, ELSS funds, NPS, and PPF - all offer competitive benefits. While ELSS funds are great for investors who aim for balancing growth potential, short lock-ins, and 80C benefits, NPS and PPF go a step further with their EEE status. Generally, most investors tend to invest in all three for a more balanced approach.

But at the end of the day, which tax-saving scheme you choose depends entirely on your goals, risk appetite, and under which regime you file your taxes. For instance, if you file under the new regime, you should note that 80C and 80CCD (1B) benefits are not available any more. That said, you can still consider them for portfolio diversification, long-term investing, and of course, retirement planning.

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