Synopsis: This article compares the Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), and National Pension System (NPS) in detail, discussing which is the best tax-saving investment and what the ideal allocation strategy is for saving tax while earning more.
Even though household savings fell from 11.5% of GDP to 5.1% in the past 5 years, nearly 70% salaried individuals who file returns claim 80C deductions. This highlights the role of tax-saving instruments such as ELSS, PPF, and NPS in tax planning for middle-income earners.
ELSS vs PPF vs NPS
Equity Linked Savings Scheme (ELSS)?
What is it: Equity Linked Savings Scheme is an equity mutual fund that primarily invests in equities and related instruments.
How it works: A minimum of 80% of the fund is invested in equity instruments, and investors can invest in ELSS either through a lump sum or via Systematic Investment Plans (SIPs).
Tax Benefits: Under Section 80C, ELSS investments qualify for tax deduction up to ₹ 1.5 lakh in a financial year. Additionally, up to ₹ 1 lakh of long-term capital gains (LTCG) is exempted from tax, and gains above ₹ 1 lakh are taxed at 10%.
Public Provident Fund (PPF)?
What is it: Public Provident Fund is a long-term investment scheme designed to promote disciplined savings and is backed by the Government of India.
How it works: The minimum investment amount is INR 500, and the maximum investment amount is INR 1.5 lakh in a financial year. PPF can be opened in banks or post offices by a resident of India, and the tenure is 15 years. Investments can be made in a lump sum or through multiple instalments.
Tax Benefits: PPF is one of the most tax-efficient investment options available as it has the EEE tax-exempt status. EEE is a tax treatment for investments where the investment is tax-free at all stages of its lifecycle. PPF is eligible for tax deduction up to INR 1.5 lakh under Section 80C for its investment, the interest earned is tax-free, and the maturity amount is also fully tax-free.
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National Pension System (NPS)
What is it: The National Pension Scheme is a government-sponsored retirement savings scheme that aims to help individuals build a pension income post-retirement. It’s a market-linked instrument and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
How it works: An NPS account can be opened as a Tier 1 retirement account. The contributions to this account are invested across various asset classes such as equity, corporate debt, and government bonds. Furthermore, investors can choose between an Active Choice or an Auto Choice. Under active choice, the asset allocation can be decided, but under auto choice, the asset allocation changes according to the individual’s age.
Tax Benefits: Under Section 80C, contributions up to INR 1.5 lakh qualify for deduction, and under Section 80CCD (1B), an additional deduction of INR 50,000 is provided for NPS. This allows investors to gain a total tax deduction of INR 2 lakh per year.
Smart Allocation Strategy
Each instrument serves each purpose. While ELSS is for growth and wealth creation, PPF prioritises stable tax-free returns. Meanwhile, NPS focuses on building a retirement corpus. Strategically investing in all three of the instruments creates a well-rounded tax-saving investment approach.
The INR 1.5 lakh limit under Section 80C can be utilised by splitting the investment between ELSS and PPF. Along with that, the additional deduction of INR 50,000 under Section 80CCD(1B) can be fully utilised by investing in NPS.
By combining all three, investors can manage risk as well as meet their financial goals.
So Which Is Best for Tax-Saving?
There is no single ‘best’ tax-saving investment. ELSS, PPF, and NPS each serve different financial needs. A balanced allocation across all three helps investors maximise tax savings, manage risk effectively, and build wealth in a structured manner aligned with their financial goals.
FAQs
There is no single best option as all three have different objectives and investment styles. ELSS is better for higher returns, PPF is ideal for stability and safety, and NPS is suitable for retirement planning. So, the best option varies by individual depending on factors like risk appetite, financial goals, etc.
Yes. You can invest in all three at the same time; in fact, it’s the efficient strategy to invest more and reduce taxable income.
Yes. Returns from PPF are completely tax-free as it enjoys the EEE tax status, meaning investment, interest earned, and maturity amount are all exempt from tax.
Written by Nila Maria Jacob
