Tax saving under 80C - NPS vs ELSS vs PPF

Jun 4, 2019

For tax saving under section 80C is ELSS a better option or NPS or i should choose a mix of both + PPF? I already have mediclaim and HRA for tax saving.

3 Answers
Jun 8, 2019

Before we get into the answer lets compare the 3 schemes, very briefly. It is difficult to describe all the features of ELSS, PPF and NPS in a single answer. So here is a very short description of these options:

  1. ELSS: Type of an equity mutual fund which invests at least 80% of its total assets in equity and equity-related instruments lock-in of 3 years. Returns are linked to the stock market.
  2. PPF: Fixed interest savings scheme offered by the Government of India. Interest rate is fixed every quarter. As of June 2019 the interest rate is 8%. Since this is a government backed scheme, returns are relatively risk free. Locking period is 15 years.
  3. NPS: It is too complicated to describe in a single line. The money is locked in till your retirement (actually till you are 60)i.e. you cannot withdraw any money until you are 60 (partial withdrawals are allowed but lets not get into that now). For practical purposes majority of your invested money will remain locked in.

Short Answer

The choice between ELSEE, PPF and NPS will depend on:

  1. Your goals - longer term goals typically have higher allocation to equity than debt
  2. Risk appetite - invest in equity linked instruments if you understand the risks involved
  3. Time horizon of investment i.e. how long do you want to remain invested?

Long Answer

Let me given an unconventional response. This question is somewhat similar to this: Weight loss regimen - Wheat vs Milk vs Porridge - Which is better? Let me explain.

The Indian tax code provides a number of ways to reduce the tax outgo for individual taxpayers. Instead of looking at specific products, we can divide the set into two categories.

  1. Cost adjustment (encouragement of good behaviour)
  2. Savings motivation (encouragement of particular saving habits)

Each set has a whole set of instruments and alphabet soup of section numbers. Examples of the first set are:

  • 80 Dxx – Health insurance
  • 80 C – Life insurance premium, Investment products, Housing loan principal for self occupied house, School fees, …
  • Sec 24 – Housing loan interest
  • Sec 80E - Education loan interest
  • Sec 80Gxx - Donations

You may or may not agree that these are 'good things' to encourage. However, if you do incur these expenses, you should claim the allowed tax deductions. And of course, you should not incur the expense just because it can save tax. It would be like buying an item that you don't need just because it is 30% off MRP.

A very interesting point that very few people know. School fees for children are part of 80C deductions.

The second set includes a whole raft of 'investment' products. Do note that I called them 'investment' products. Investments are always done with a goal in mind. All of us have a good number of financial goals. If the plan for the goal includes equity products (most plans would), then you should consider ELSS. If the plan includes long-term debt products (again most plans should have this), then you should consider PPF. In either case, you should not approach them primarily as tax saving instruments. NO. You should buy them because they align with your financial plan. Tax deduction is a bonus. I consider PPF (and EPF) to be the best debt product available. I personally invest in PPF even though my 80C limit is met by items in the first set.

You asked about NPS - the simple answer "It is complicated". If there is a product that is a counter-example of the approach that I suggest, it has to be NPS. It may be suitable for some people, For many people - particularly those who may stop working well before they are 60 - it is not a good product at all. Buying NPS just because of tax deductions would be a big mistake.

In addition to these, there are methods to structure the salary package and include allowances that are tax free. HRA is one example. Of course, any smart person should look to maximize these options.

To Summarize

Be clear in your mind on the need for one or more of these products. If your financial plan has a place for them, do buy them. If not, stay away from them.

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Like Srinivasan’s answer? Contact Srinivasan for consultation

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Jun 8, 2019

Lets first understand brief about these three options

  1. PPF is one of the most favorite debt products in India. It is mainly used for long term investment. It gives Compounding Interest benefit. PPF enjoys EEE status. Contribution to PPF account is eligible for tax benefit under Section 80C of the Income Tax Act. Interest earned is exempt from income tax and maturity proceeds are also exempt from tax.
  2. NPS is a relatively new product. It was launched on 1st January 2004. National Pension System (NPS) is a pension cum investment scheme launched by Government of India to provide old age security to citizens of India. It brings an attractive long term saving avenue to effectively plan your retirement through a safe and regulated market-based return.
  3. An Equity Linked Savings Scheme (ELSS) is an open-ended mutual fund that doesn't just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act up to 1.5L investment.

ELSS schemes are a category of mutual fund promoted by the government in order to encourage long term equity investments. Under this scheme, most of the fund corpus is invested in equities or equity-related products. There are two categories in ELSS mutual funds i.e. dividend and growth.

Now lets understand difference in these 3 products

What is the maturity period?

  1. PPF: A PPF account matures in 15 years. One can also extend this term after 15 years by a block of five years with or without making a further contribution.
  2. NPS: The maturity tenure is not fixed. You can contribute to the NPS account till the age of 60 years with an option to extend the investment to the age of 70 years.
  3. ELSS: The maturity tenure is not fixed.You can keep on investing in ELSS till you wish.

What is the investment limit per year?

  1. PPF: Minimum Rs. 500 annually, with the maximum amount capped at Rs. 1,50,000. A maximum of 12 contributions per year is allowed.
  2. NPS: Minimum contribution required is Rs. 6,000. There is no limit on contribution as long as it does not exceed 10% of your salary or 10% of your gross total income in case you are self-employed.
  3. ELSS: Minimum contribution required is Rs.500 annually. There is no limit on contribution.

What is the lock in period of the product?

  1. PPF: Mandatory lock in period is 15 years.
  2. NPS: Mandatory lock in period isupto 60 years of the investor.
  3. ELSS: Mandatory lock in period isjust 3 years, least among all options available under section 80C.

Are returns decided by government or market-linked?

  1. PPF: The Interest rate is decided by the government
  2. NPS: The return rate is linked to the market. Potential returns are therefore higher
  3. ELSS: The returns are linked to the market. Potential returns are highest among all options available under section 80 C.

Can I choose where and how to invest money in these products?

  1. PPF: No
  2. NPS: Yes, you can choose between equity funds, government securities fund and fixed income instruments, and other government securities.
  3. ELSS: You can choose the scheme among the pool of ELSS scheme which suits your risk apatite.

Is premature or partial withdrawal allowed?

  1. PPF: Partial withdrawals are allowed after the 7th year onward with some limitation. Loans during the third and sixth financial years of opening the account are available; but subject to conditions
  2. NPS: After 10 years, account holders become eligible for early, partial withdrawal under specific circumstances. However, to exit before retirement, one must use at least 80% of the accumulated corpus to buy a life insurance annuity
  3. ELSS: Neither you can withdraw nor you can switch funds from ELSS schemes before completion of 3 years from the date of investment.

Is annuity offered at the time of maturity?

  1. PPF: No
  2. NPS: At maturity, you need to buy an annuity worth at least 40% of the corpus, unless the maturity amount is less than 2 lakhs
  3. ELSS: No

Is the principal protected and interest guaranteed?

  1. PPF: Yes
  2. NPS: As there is equity portion in NPS returns, so returns are not guaranteed as well as principal not protected fully.
  3. ELSS: Investment in ELSS are subject to market risk so returns are not guaranteed as well as principal not protected.

So theses points of difference must have given you the overall features of these 3 product. ELSS is pure Equity product. NPS is half equity half debt as per your choice or can be 100% debt if you wish and PPF is pure debt option. So you cant compare orange,apple and banana.

But what you can do is make a good fruit salad of these 3 for enjoying all 3 fruits. Same can be done with PPF, NPS and ELSS. You can divide your 1.5 lakhs among 3 as per your age and risk profile. Or else you can combine PPF+ELSS as most tax payers do to enjoy benefits of equity and debt asset classes.

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Jun 8, 2019

To keep things Simple you should opt for PPF as an option for the tax savings required under section 80C because

  1. It is a long term saving instrument
  2. It provides a reasonable good rate of return
  3. The Interest earned is tax free
  4. The withdrawal at maturity is tax free
  5. There is no restriction on withdrawal at maturity
  6. You have the option to extend the tenure after maturity
  7. You have the flexibility to invest Rs. 500 to Rs. 1,50,000 per Year
  8. No confusion in choosing such as best performing fund etc.
  9. Even for long term Goal requirement such as Retirement , you need to have exposure to Fixed Income instruments for providing stability to your portfolio, hence PPF is a good option.

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