Is ELSS better than NPS?

The only 80C investment option that has the potential to give returns comparable to ELSS is the National Pension Scheme (NPS). In 2015-2016 budget the Government has provide additional tax savings for investment in NPS. Investors can get an additional tax benefit of र 50,000 over and above the 80C limit of र 1.5 lacs, under Section 80CCD by investing in NPS. This makes NPS an attractive investment option for tax payers. However, a major disadvantage of NPS versus ELSS is the tax treatment on maturity. While capital gains in ELSS are tax free, NPS maturity amount is taxable on withdrawal. The other problem is that, under the current rules, 40% of the NPS maturity amount must compulsorily be used to purchase annuities and the annuity income is taxable. There are also limits on equity allocations in NPS, which younger investors may find too conservative relative to their risk profile. However, NPS has certain advantages too. The fund management cost of NPS is lower than that of ELSS. While we will not get into a comprehensive evaluation of NPS in the blog, it suffices to say that, pros and cons notwithstanding, NPS is also a good investment option for younger investors.