Wealth Guide: Income Tax-saving instruments – How ELSS and NPS help you save more money

Tax saving instruments are always supposed to live up to their name – that is, be a vehicle for saving taxes. But over the years these tax-saving vehicles have performed as well as many investment instruments in terms of returns and have contributed to wealth creation. This puts them in the league of instruments that offer the best of both worlds – tax saving and capital appreciation. Vikas Singhania, CEO, TradeSmart, shares his knowledge on such two Income Tax-saving instruments that help you save maximum money.

ELSS

“Under Section 80C an Equity Linked Savings Scheme (ELSS) allows an individual or HUF a deduction from the total income of up to Rs 1.5 lakh. The schemes have a lock-in period of three years after which the units are the units can either be redeemed or switched,” advised Vikas Singhania.

“Among the other advantages of the scheme is that it comes in both growth and dividend options and the investor has the flexibility of investing through a Systematic Investment Plan (SIP),” Singhania added.

He further added, “These schemes generally see inflows between December to March as most taxpayers use these three months to plan their taxes. However, if one uses the entire year and starts a systematic investment plan (SIP), the monthly burden on the budget will be lower. This will also give them a better entry point and gain from the benefits of compounding and averaging.”  

“A tax planning fund gives better returns because they invest at least 80 percent of their assets in equity and equity-related instruments.”

“There are two ways that investors generally use the ELSS schemes, one is at the maturity of a scheme they reinvest it, thus new capital is not involved after the first three-year cycle. However, those who generate higher income and need to use all tax planning instruments use the SIP route. Such investors have used ELSS as a long-term investment vehicle. For the past five years, these schemes have given between 16-23 percent compounded annual growth rate, depending on the schemes one invests in,” he advised.

NPS

Singhania says, “National Pension Scheme (NPS) has grown in popularity among tax planners and investors. Anyone between the age of 18 to 70 can join the NPS. One can continue with the NPS till you are 75 years old and avail of the tax benefits.”

“The reason for its popularity is the higher returns it has been generating. New investors in the scheme can now invest up to 75 percent in equities, which is why we see increased investment in the market through pension funds. Top asset management companies that are selected by the government manage these funds.”

“Another advantage of this scheme is that one can save taxes under three sections. Investments under NPS can be claimed as deductions under Section 80C up to the prescribed limit of Rs 1.5 lakh. In a subsection 80CCD (1b) additional Rs 50,000 can be claimed and not to forget the employee’s contribution towards the NPS account qualifies for a tax deduction up to 10 percent of the basic salary and dearness allowance under Section 80CCD(1) of the IT Act,” he added.

“Both ELSS and NPS have given higher returns on account of their investment in equity schemes. Equity as an asset class will give higher returns over the long run though they may be the most volatile. But if one gets the benefit of tax saving and the chance to build their wealth over the long term, these instruments can be an integral part of one’s financial planning,” he concluded.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)