PPF vs NPS vs ELSS – Best Long-Term Tax-Savings Schemes

Best Long-Term Tax-Savings Schemes in India

PPF, NPS, and ELSS are the three most talked-about long-term tax saving schemes. Most of us would like to know which one is best amongst the three. But this knowledge we usually search at the end of the fiscal year when our employer forces us to submit tax- savings investment proof. For the sake of saving tax at the last minute, without gaining sufficient knowledge, we rush to invest in the scheme which our near and dear ones suggests without even knowing the best and suitable scheme for us. This practice only fulfills our sole objective of tax-savings but does not fulfill our long-term financial goal i.e. for what purpose we are investing? Do the returns from investment suffice our need? What is our risk taking capacity? Etc.

Coming to the schemes, all of three schemes are from different orbit i.e. PPF (Public Provident Fund) falls in debt category, ELSS (Equity Linked Savings Scheme) falls in equity category whereas NPS (National Pension System) is a hybrid category which includes both debt part and equity part under one umbrella.

Public Provident Fund at Glance

PPF being the first entrant amongst all three that have been in circulation since 1968, let’s see the PPF features first:

1. Public Provident Scheme is Government Backed Scheme that offers Guaranteed Returns and can be opened in a post office, nationalized banks and major private banks such as ICICI, Axis, etc.
2. Only Indian Resident can open only one PPF account and any contribution towards PPF gets Tax-Savings under section 80C up to ₹ 1.50 lakhs per person per financial year and the minimum amount to keep the PPF account active is ₹ 500 per annum. You can also revive the inactive account by paying the minimum amount with meager ₹ 50 penalties for the default period. The PPF interest rates vary from quarter to quarter, the same is depicted in the image below:

3. There is a lock-in period of 15 years which means you cannot fully withdraw or exit from the scheme before 15 years however partial withdrawals up to 50% of the balance are allowed from the 7^th year. At maturity, the account can be extended with or without contribution in a block of 5 years at a time for n number of times.
4. PPF account falls under EEE tax category i.e. Tax-Savings of contribution, interest earned and the maturity amount. The best part is that PPF account is immune from attachment from any order or decree of any court.
5. A loan can be availed against PPF account from 3^rd year to 6^th year from the date of account opening and the maximum loan can be up to 25% of the balance standing in the account at the start of the 3^rd financial year. The interest rate is always 2% higher than the interest rate provided by the PPF account.

Read Mistakes while Calculating Retirement Fund

National Pension System at Glance

NPS is the second entrant in the tax-savings list and is introduced in the year 2004 but only for Government Employee which was later opened to all citizens of India in the year 2009. Let’s have a look at the features of NPS:

1. NPS is a Government Sponsored Pension Scheme which allows every Indian Citizen aging between 18 years to 60 years to open and invest in NPS through PRAN (Permanent Retirement Account Number). The account can be opened with Point of Presence (POP) entities which include almost all private and public sector banks, as well as several financial institutions.
2. Investment under NPS is eligible for Tax-Savings up to ₹ 1.50 lakhs u/s 80CCD(1) and additional ₹ 50,000 u/s 80CCD(1B). The contribution by employers is also tax-free in the hands of the employee.
3. The minimum contribution under NPS tier I account is ₹ 6,000 per annum and in case you don’t pay the minimum amount than a penalty of ₹ 100 is to be deposited to reactivate the account. Tier II account is a voluntary savings account and you can freely contribute and withdraw without any Tax-Savings.
4. NPS amount is invested in mutual fund with maximum exposure up to 75% (chosen by the contributor/investor) which is managed by PFRDA registered Fund Managers namely ICICI Prudential Pension Fund, LIC Pension Fund, Kotak Mahindra Pension Fund, Reliance Capital Pension Fund, SBI Pension Fund, UTI Retirement Solutions Pension Fund, HDFC Pension Management Company, and Aditya Birla Sun Life Fund Managers.

5. Since NPS is a pension scheme you have to compulsorily stay invested till your retirement age of 60 years and after that, you can withdraw 60% which is completely tax-free. Remaining 40% is to be used to buy an annuity which is taxed as per the applicable income-tax slab. In case you want to withdraw before attaining the age of 60 years then only 20% is allowed to be withdrawn as a lump sum remaining needs to be annuitized.

Equity Linked Savings Scheme at Glance

For the aggressive and risk-taking investors, Government has fared a fully equity oriented tax savings scheme under the name of Equity Linked Savings Scheme which has majority corpus invested in equities. Let’s have a brief of the ELSS scheme:

1. The ELSS invests in diversified equity mutual fund scheme which has a lock-in period of 3 years from the date of investment which means each of your SIPs (Systematic Investment Plan) has an individual lock-in period of 3 years. The minimum investment is ₹ 500 and thereafter in multiples of ₹500.
2. Anyone can invest in the ELSS funds and can reap tax-savings u/s 80C up to ₹ 1.50 lakhs, however; the returns generated from ELSS are not tax-free and are taxable over and above ₹ 1 lakhs. The dividends are tax-free in the hands of the investors.
3. Since ELSS is allowed to invest 100% in equity related funds, the returns are fluctuating and could be bumper but not at all assured. You can either invest a Lump sum amount at one go or opt SIP plans. Further, the investor can choose either growth fund or dividend fund as per the need of regular income source.
4. No premature withdrawal or switching of funds is allowed and you have to remain invested till the lock-in period of 3 years. This lock-in period is made mandatory to reap the benefits from the funds because history shows that the longer the investment period the higher the returns from ELSS funds.
5. ELSS funds have no boundations on investing in small cap or large cap companies but one must not choose funds which invest in only one type of companies, the chosen funds should have diversified portfolio.

Comparison between PPF Vs. NPS Vs. ELSS

Words of Wisdom

The investment decision is thoroughly based on three things Time Horizon, Risk-Appetite, and Financial Goal. In case you have no limitations with time horizons and are willing to take the risk, then a mix of ELSS funds and PPF is for you. But in case you are looking for regular income post retirement with medium risk appetite then you can also go for NPS but remember there are no pre-mature withdrawals allowed under NPS and once you invested the amount, it gets locked-in till retirement age.