Systematic Investment Plan (ELSS) vs National Pension Scheme (NPS)
By: Sayi Tteja
Tags: Equity, Sip, Income, Income Tax, Investment Management

This article is intended to compare and contrast the features of ‘ELSS’ & ‘NPS’ schemes on various parameters and help investors to choose between them based on their specific goals.

Investment Characteristics

ELSS — ELSS stands for Equity-linked savings scheme. As the name suggests this instrument offers an exposure to equity markets, while also providing tax-saving on investments. The investment is through a Systematic Investment Plan (SIP.) Investments are made in a mutual fund to buy units of the fund, and a standard amount can be set aside from the monthly income for this purpose. Every night, the fund calculates the NAV (Net Asset Value) — which is the total assets less the total liabilities divided by the total number of units issued by the fund. The value of the NAV multiplied by the number of units purchased by the investor is her investment value on any given day.

NPS — It stands for National Pension Scheme. It was launched by the Government of India to encourage savings and establish a good retirement corpus for the citizens of India. There are 3 asset classes in which to invest: Equity (E), Corporate Debt / Non- govt. fixed income securities © and Government securities (G). The choice of distribution of the investment among the asset classes could be at the discretion of the investor (Active choice) subject to the condition that the investment in equity should be at most 50%. On the other hand, if the investor is unable to make a choice for any reason then the funds will be distributed based on a ‘Lifecycle fund matrix’ (Auto-choice) which is dependent on the current age of the investor. There are 2 tiers (Tier 1 is mandatory to set up a Tier 2 fund.)

Management of fund & Choice of investments

ELSS — The fund manager of the mutual fund manages the allocation & rebalancing of investments primarily in the equity markets. The investor can choose to diversify her investments by investing in multiple ELSS funds. The investor can choose to stop investing in an under-performing fund and consequently increase the investment in any alternate fund.

NPS — The investor can choose one among the available Pension Fund Managers (PFM) and select the allocation amongst the 3 asset class alternatives in Tier 1 (subject to certain restrictions) and Tier 2 (if applicable.) The PFM will then invest and manage fund performance for the investor.

Contribution to the fund

ELSS — There is no minimum contribution to the fund that needs to be made nor is there an upper limit to the amount of investment that can be made. The investor has full discretion to manage his contributions to the funds. An investment of at least 500 rupees should be made at the time of subscribing to the scheme.

NPS — A minimum of 500 rupees per month is to be made under a Tier 1 account, and 1000 rupees per month under a Tier 2 (if applicable) account.

Lock-in period

ELSS — The minimum lock-in period is for 3 years. Post this the investor is free to withdraw all or part of his investments in the fund.

NPS — Withdrawals from Tier — 1 account can be made only after attaining age 60. Post this, a maximum of 60% of the amount can be withdrawn as lump sum, whereas 40% is to be used to purchase an annuity. There are no restrictions for withdrawals for Tier — 2 accounts.

Tax Benefits

ELSS — Investments in ELSS can be tax-exempt up to 1.5 lakhs. However long-term capital gains tax needs to be paid for gains more than 1 lakh.

NPS — Investments are tax-exempt up to 2 lakhs. 40 % of the withdrawals on reaching age 60 are taxed, i.e., the minimum amount which should be invested to buy an annuity on retirement.