Most people wake up to tax planning, only when the accounts department in their office rings the alarm bell in December, to submit tax-saving investment proof. A few frantic phone calls and visits to tax planners, and postal/ insurance agents later, the pressing need for investments and the proof thereof are met. Most people make no attempt to understand the process of tax planning thoroughly. As a result, they often end up parking their money in schemes that do not usually serve their long-term financial goals. Saving taxes becomes the sole objective, at that point in time. This is despite the fact that tax planning should always be incidental to one’s financial planning. Let us have a detailed look at some of the popular tax-saving options.
Public Provident Funds (PPFs) and the National Pension System (NPS) along with Equity Linked Savings Scheme (ELSS) have been the most popular long-term investment schemes in our country. Compared to PPFs that have been in circulation since 1968, NPS is a much later entrant, introduced only in Jan 2004. However, to a rising number of young investors who are open to a fair bit of risk, Equity Linked Savings Schemes (ELSS) offered by mutual fund houses, have emerged as a worthy opportunity to generate attractive long-term returns, when invested for a longer period. All of them have been designed in a way to build one’s retirement corpus.
But how do the three schemes stack up against each other? Let’s have a look at each of them and find out what they have for us:
PPF is one of the best tax-saving options for the risk-averse investor. It offers triple benefits of tax saving, risk-free and tax-free returns. A single investor can deposit a maximum of Rs. 1.5 lakhs per annum in his/her PPF account. Leading to a yearly tax saving of around 45,000/- for those who are in the highest tax bracket.
In our country, the interest rates have been low for quite some time now and the same is expected to tighten from this year. While interest rate hikes are undeniably good news for PPF investors, we may witness higher PPF rates in the coming years because they are linked with the 10-year bonds.
Following is how the PPF interest rates have changed over the years:
| Period | Interest Rate (%) | Limit for Investment |
| 01.04.1968 to 31.03.1969 | 4.8 | 15000 |
| 01.04.1969 to 31.03.1970 | 4.8 | 15000 |
| 01.04.1970 to 31.03.1971 | 5 | 15000 |
| 01.04.1971 to 31.03.1972 | 5 | 15000 |
| 01.04.1972 to 31.03.1973 | 5 | 20000 |
| 01.04.1973 to 31.03.1974 | 5.3 | 20000 |
| 01.04.1974 to 31.07.1974 | 5.8 | 20000 |
| 01.08.1974 to 31.03.1975 | 7 | 20000 |
| 01.04.1975 to 31.03.1976 | 7 | 20000 |
| 01.04.1976 to 31.03.1977 | 7 | 20000 |
| 01.04.1977 to 31.03.1978 | 7.5 | 20000 |
| 01.04.1978 to 31.03.1979 | 7.5 | 30000 |
| 01.04.1979 to 31.03.1980 | 7.5 | 30000 |
| 01.04.1980 to 31.03.1981 | 8 | 30000 |
| 01.04.1981 to 31.03.1982 | 8.5 | 30000 |
| 01.04.1982 to 31.03.1983 | 8.5 | 40000 |
| 01.04.1983 to 31.03.1984 | 9 | 40000 |
| 01.04.1984 to 31.03.1985 | 9.5 | 40000 |
| 01.04.1985 to 31.03.1986 | 10 | 40000 |
| 01.04.1986 to 31.03.1988 | 12 | 40000 |
| 01.04.1988 to 31.03.1999 | 12 | 60000 |
| 01.04.1999 to 14.01.2000 | 12 | 60000 |
| 15.01.2000 to 28.02.2001 | 11 | 60000 |
| 01.03.2001 to 28.02.2002 | 9.5 | 60000 |
| 01.03.2002 to 31.03.2002 | 9 | 60000 |
| 01.04.2002 to 28.02.2003 | 9 | 70000 |
| 01.03.2003 to 31.03.2011 | 8 | 70000 |
| 01.04.2011 to 30.11.2011 | 8 | 100000 |
| 01.12.2011 to 31.03.2012 | 8.6 | 100000 |
| 01.04.2012 to 31.03.2013 | 8.8 | 100000 |
| 01.04.2013 to 31.03.2014 | 8.7 | 100000 |
| 01.04.2014 to 31.03.2016 | 8.7 | 150000 |
| 01.04.2016 to 30.09.2016 | 8.1 | 150000 |
| 01.10.2016 to 31.03.2017 | 8 | 150000 |
| 01.04.2017 to 30.06.2017 | 7.9 | 150000 |
| 01.07.2017 to 30.09.2017 | 7.8 | 150000 |
| 01.01.2018 to 30.09.2018 | 7.6 | 150000 |
| 01.10.2018 to 30.06.2019 | 8 | 150000 |
| 01.07.2019 to 31.03.2020 | 7.9 | 150000 |
| 01.04.2020 to 30.09.2020 | 7.1 | 150000 |
| 01.10.2022 to 31.12.2022 | 7.1 | 150000 |
| 01.01.2023 to 31.03.2023 | 7.1 | 150000 |
What about NPS?
The NPS was introduced to extend retirement income to all citizens and aims to still pension reforms, besides inculcating the habit of savings. Investors in NPS qualify for an additional deduction of Rs. 50,000 under section 80CCD (1B) of Income Tax rules.
The regulator recently has increased the entry age into NPS from 65 to 70 years. Earlier the entry age was 65 years. Now, anyone between 18-70 years would be able to subscribe to NPS. Now there is a lock-in period of 3 years for new subscribers joining NPS after 65 years. The maximum age for exit is 75.
Subscribers joining NPS after 65 years can exercise the choice of Pension Fund and Asset Allocation with the maximum equity exposure of 15% and 50% under Auto and Active Choice respectively. The Pension Fund can be changed once per year whereas the asset allocation can be changed twice.
An NPS subscriber is allotted a Permanent Retirement Account Number (PRAN), which provides access to two personal accounts listed below:
Tier I account: It’s a non-withdrawable account till the person reaches the age of 60 years. However, if the account is active for a minimum of 3 years, partial withdrawal is allowed in specific cases such as children’s higher education, children’s marriage, treatment of illnesses like cancer, renal failure, organ transplant etc.
However, an NPS subscriber can withdraw up to 25% of the contributions made. All tax benefits associated with NPS are linked to Tier 1 accounts only.
The minimum amount that can be deposited in a financial year to keep the NPS Tier I account isRs.1000.Also, the minimum balance to be maintained in the account is Rs.2000.
Tier II account: This is a simple voluntary savings facility. The subscriber can freely withdraw from the account. But no tax benefit is available.
The advantage of a Tier 2 account is low fund management charges at that rate of 0.1% of the invested.
There is no minimum annual contribution required nor there is a need to maintain a minimum balance in a Tier 2 account.
Tax Treatment of NPS
Tax treatments for Tier I contributions are currently considered under Exempted-Exempted-Taxed (EET). Tax deduction of Rs. 1.50 Lakhs under section 80CCD (1A) is allowed.
However, due to the EET regime, the accumulated amount at the time of closure or opting out, 60% of the total amount payable is exempt from tax for employees as well as business people. The remaining 40% of the accumulated amount is taxable. However, if the maturity corpus is below Rs 5 lakh, the subscriber can withdraw the entire amount
Also, depending on the age of exit, 40% or 80% of the total corpus has to be compulsorily used to buy an annuity. The annuity payments received is taxable as Income from Other Sources.
Also read: NPS vs. Mutual Funds: A Retirement Planning Perspective
NPS returns
NPS funds are invested in three broad equity categories (mostly Nifty stocks), government securities and corporate debts. In equities, all funds over the last year returns are lower due to unfavourable market conditions, over 3 and 5 years periods the returns are higher than 2% – 3% from the equity NPS. Previously the spread between Corporate Debt NPS & Debt Mutual Funds was about 2%-3.5% but now it is reduced merely to 1%.
Let’s have a look at the returns generated by NPS Tier- I account under various schemes:
Comparison of NPS returns since inception
| Particulars | SBIPF | LICPF | UTIRSL | ICICI PF | KOTAK PF | HDFC PF | BIRLA PF | TATA PF | MAX LIFE PF | AXIS PF |
| Assets ( Rs in crore ) | 56.2 | 13.38 | 8.32 | 33.24 | 8.62 | 164.13 | 2.88 | 0.52 | 0.08 | 0.48 |
| Scheme Inception Date | 13-10-2016 | 13-10-2016 | 14-10-2016 | 21-11-2016 | 14-10-2016 | 10-10-2016 | 15-05-2017 | 19-08-2022 | 12-09-2022 | 21-10-2022 |
| 3 Months | 2.51% | 1.92% | 2.72% | 2.78% | 2.62% | 2.58% | 2.80% | 1.99% | 1.75% | 1.78% |
| 6 Months | -0.70% | 2.49% | 0.95% | 0.29% | -0.70% | 2% | 0.79% | 3.60% | NA | NA |
| 1 Year | -1.26% | 6.11% | 3.67% | 0.99% | -0.80% | 3.66% | 1.94% | NA | NA | NA |
| 2 Years | 4.64% | 6.39% | 5.44% | 5.50% | 3.52% | 7.92% | 6.29% | NA | NA | NA |
| 3 Years | 6.58% | 8.13% | 5.19% | 7.30% | 4.62% | 8.92% | 5.51% | NA | NA | NA |
| 5 Years | 8.71% | 7.85% | 5.81% | 6.63% | 6.24% | 8.36% | 5.84% | NA | NA | NA |
| Since Inception | 8.21% | 7.49% | 6.02% | 6.57% | 6.24% | 8.18% | 6% | 5.10% | -10.02% | 3.74% |
ELSS as a tax-saving option
For Investors with a higher risk appetite and young age for them, ELSS is one of the suitable tax savings options under 80C. An ELSS provides multiple benefits like capital appreciation, 80C Deduction up to 1.5 Lakh, along with the least lock-in period of 3 years among other 80C investment avenues.
The dividends are tax-free at the hands of the investor. Long-term capital gains of above Rs.1 lakh from ELSS is subject to tax at the rate of 10% of the gains made. Equities, over a longer period of time, give higher returns against any other asset class. But since ELSS investments are linked to the market, they are subject to volatility and risks.
PPF vs. ELSS
In a strict sense, it won’t be fair to compare PPF and ELSS as both ELSS and NPS, gives exposure to equity whereas PPF forms the debt component of your portfolio. Let us compare the returns for 50,000 invested every year in an ELSS fund and PPF over a period of 8 years.
If you had Invested 50,000 annually in PPF from 2013, the PPF Corpus as on March 2021 was 6.24 Lakhs along with the cumulative investment of 4.50 Lakhs over a period of 8 years.
The chart below reveals PPF returns during the investment tenure:
| Year | Returns |
| 2013 | 50000 |
| 2014 | 104000 |
| 2015 | 162320 |
| 2016 | 225305.6 |
| 2017 | 293330 |
| 2018 | 366796.5 |
| 2019 | 446140.2 |
| 2020 | 531831.4 |
| 2021 | 624377.9 |
On the contrary if you would have started with 50,000 as yearly investment in any top ELSS fund in 2013, the corpus was 9.79 Lakhs in March 2021.
The chart below reveals the ELSS returns during the investment tenure:
| Year | Returns |
| 2013 | 50000 |
| 2014 | 109300 |
| 2015 | 179629.8 |
| 2016 | 263040.9 |
| 2017 | 361966.6 |
| 2018 | 479292.3 |
| 2019 | 618440.7 |
| 2020 | 783470.7 |
| 2021 | 979196.2 |
This is a reason why one should look for investments in ELSS funds where the investment period is more than 7-8 years. It allows your investment to grow over time and create wealth for you.
ELSS vs. NPS
In the paragraph above, we have compared a debt-oriented instrument with an equity-oriented instrument. Let’s just also compare two instruments that give us exposure to equity funds and see which one is better among the two based on the points below:
- Taxation: Currently ELSS is the best tax saving instrument among all which offers better returns over the long term and comes with the shortest lock-in period i.e. 3 years. On the other hand, NPS on maturity is tax-free for up to 60% of the total corpus accumulated and the remaining 40% is taxable.
- Annuity: As stated above, in NPS you have to put at least 40% of your funds in an annuity which is not the case in ELSS, which means you have access to your money once the lock-in period gets over if you choose to go with ELSS.
- Equity Exposure: Equity Linked Savings Scheme (ELSS) has equity exposure in the portfolio where there are no restrictions on the exposure. On the other hand, NPS has also increased its equity exposure from 50% to 75% based on investor choice which provides the flexibility for aggressive investors to take higher equity exposure within the NPS.
- Returns: ELSS is a purely equity-based scheme so returns will be always higher as compared to NPS which has limitations on equity exposure.
- Liquidity: Tier 1 investors can only withdraw 20% of the corpus before reaching 60 in the case of NPS. However, to attain this, you should have made contributions for a minimum of 10 years and only 3 withdrawals are allowed which is further subject to a gap of 5 years between each withdrawal. On the other hand, even though you cannot withdraw money before 3 years in ELSS, you will have access to your money in just 3 years from the date of allotment.
However, despite ELSS giving you the option of liquidity in just 3 years, withdrawing money would result in the depletion of your retirement corpus. Hence, it’s advisable to stay invested for a longer duration as these instruments are designed to build your retirement corpus. That means the longer you stay invested, the larger will be your retirement corpus.
Also read: EPF to NPS: Is it worth transferring your money?
PPF vs. NPS vs. ELSS
So which of the three Your Investment preference should be defined by your long term objectives and risk profile. The latter is based on many factors. Financial situations, age, occupation are the few important elements.
Investors who understand the risks involved in equity should consider the option of ELSS and NPS. Others should invest in the PPF. Wealth creation happens over a period of time, not overnight which is much higher with ELSS.
ELSS is suitable for young investors who have aggressive risk appetite and time to sustain different momentums of markets can only look for ELSS as an option for horizon of 6-8 years.
NPS is suitable for such investors who are looking for Investment Avenue which gives them flexibility to invest in mix of asset classes like debt, equity and government securities. NPS is better option for the investors who have long term investment horizon and want to specifically save for their retirement and tax savings purpose.
PPF is suitable for the Investors who are 10-15 years away from their retirement and wants to create a corpus by investing in PPF. Your risk tolerance level decreases as you are near to retirement age. So for such investors PPF is a good bet for them.
PPF provides stable returns over the period, one who wants to stay away from risky asset class and is fine with nominal returns over the long term can invest in PPF.
It’s mandatory for salaried people to contribute a part of their salary to the Employee Provident Fund (EPF).
EPF contribution of the employee which goes towards 80C tax savings can be replaced by ELSS if you are not nearing retirement. ELSS, via the systematic investment plan (SIP) for a long-term horizon, will help in both tax and retirement planning.So where, finally?
If you are still undecided about where to allocate your investments a combination of ELSS & PPF or NPS and PPF may be a right blend for you. As per your investment horizon and optimal asset allocation strategy invest a part in a good ELSS scheme. This will help to accumulate wealth over the period of time and PPF which can be the debt part to the portfolio with the stable returns. And for the very long-term/retirement goal, You may look at investing in NPS in combination with PPF
If you think you need professional help,
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any investment decision.
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