Tax saving options under section 80 C : Confused with PPF, NPS, ELSS

Section 80C of Income tax act 1961 allows individuals and HUFs to claim tax deduction of up to Rs. 1,50,000 from their gross total income for certain investments and payments. There are different types of investments allowed under this section but investors’ preferred choices are Public Provident Fund (PPF) National Pension Scheme(NPS) and Equity Linked saving scheme (ELSS).

Many times investors got confused between these 3 options. So through this post I tried to different these products on the basis of these key points so that investor can take well-informed decision to invest in those.

Let’s 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 let’s understand difference in these 3 products

What is the maturity period?

• 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.

• 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.

• ELSS: The maturity tenure is not fixed. You can keep on investing in ELSS till you wish.

What is the investment limit per year?

• PPF: Minimum Rs. 500 annually, with the maximum amount capped at Rs. 1,50,000. A maximum of 12 contributions per year is allowed.

• 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.

• ELSS: Minimum contribution required is Rs.500 annually. There is no limit on contribution.

What is the lock in period of the product?

• PPF: Mandatory lock in period is 15 years.

• NPS: Mandatory lock in period is up to 60 years of the investor.

• ELSS: Mandatory lock in period is just 3 years, least among all options available under section 80C.

Are returns decided by government or market-linked?

• PPF: The Interest rate is decided by the government

• NPS: The return rate is linked to the market. Potential returns are therefore higher

• 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?

• PPF: No

• NPS: Yes, you can choose between equity funds, government securities fund and fixed income instruments, and other government securities.

• ELSS: You can choose the scheme among the pool of ELSS scheme which suits your risk apatite.

Is premature or partial withdrawal allowed?

• 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

• 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

• 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?

• PPF: No

• 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

• ELSS: No

Is the principal protected and interest guaranteed?

• PPF: Yes

• NPS: As there is equity portion in NPS returns, so returns are not guaranteed as well as principal not protected fully.

• ELSS: Investment in ELSS are subject to market risk so returns are not guaranteed as well as principal not protected.

So these 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 can’t compare orange, apple and banana with each other.

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.