31st March is Down the line, which Tax Saving Investment options should I be looking for, is NPS a Good Investment?

Let’s compare the popular modes of tax saving investments

• Tax saving mutual funds (ELSS)
• National Pension Scheme (NPS)
• Guaranteed returns plans like Bank FDs, PPF, NSCs

1. Returns in long term: ELSS schemes invest in equity markets while in NPS one has option to choose between Equity, Debt and government securities. One may assume similar returns in both ELSS and NPS equity segment. If we perform study on returns generated by ELSS schemes in last 3 to 15 years, the returns are always higher in comparison to PPF or fixed security returns. The good ELSS schemes can generate up to additional 50% or even higher in the accumulated corpus against the guaranteed return plans.

2. Tenure / Lock in: Guaranteed return schemes generally have lock-in ranging from 5 to 15 years vis-a-vis lock-in of 3 years in ELSS. One needs to wait till retirement age of 60 years to withdraw 60% of corpus from NPS while the rest corpus will be compulsorily converted into monthly pension.

3. Tax benefit at the time of investment: One gets the benefit up to RS 150,000 of investment in ELSS and guaranteed returns plans. Additional benefit of Rs 50,000 can be taken by subscribing to NPS.

4. Taxability on withdrawal: The maturity proceeds are not taxable in case of ELSS and so is the case under guaranteed return plans on withdrawal. However, the proceeds of NPS scheme are tax free only up to 40% of total corpus accumulated. If we analyse considering the overall tax benefits (both at the time of investment and at maturity), , NPS scores above ELSS, provided they are able to generate good returns likewise ELSS schemes.

5. Annuity: Once the lock-in period is over, one may opt to withdraw the funds from ELSS schemes and guaranteed schemes and can invest the amount as per the choice. The basic objective behind NPS is to provide annuity. Currently, there are 6 annuity service providers who provide the annuity on amount invested in NPS. The corpus converted in annuities start earning about 6% (as currently). This leads to sharp drop in NPS earnings, when you compare long term returns of NPS.

Conclusion:

One should opt for ELSS schemes for maximising the retirement corpus. The expected higher returns of mutual fund schemes will surpass the additional tax benefit enjoyed by NPS schemes.