NPS tops tax-saver instruments in FY24; ELSS at number 2

As every financial year draws to a close, the search for efficient tax savers triggers more and more frenetic activity among the common taxpayer. For the second year running, the National Pension System (NPS) has emerged as the top tax saver in the country, reports The Economic Times.

In a yearly ranking of tax-saving instruments the newspaper has examined 10 tax-saving options on as many as eight parameters – returns, safety, flexibility, liquidity, costs, transparency, ease of investing and taxes applicable to these. Incidentally, equal weightage was given to each parameter.

While NPS occupied the top slot, the next four in order of sequence are ELSS, ULIP, Senior Citizen Savings Scheme and Sukanya Samriddhi Scheme.

The National Pension System (NPS) was introduced in 2003. It offers an additional Rs 50,000 tax deduction. It has also been made more investor-friendly down the years. One big attraction has been that investors can chose an option whereby as much as 75% of their funds can be allocated to equity, which ensures a quick appreciation of wealth in this bull market. To enable the contributors go for the flavour of the season, the NPS allows an individual to alter their asset mix once every quarter.

Participants can also choose the systematic withdrawal option to stagger withdrawals on maturity.
This year, ELSS (equity-linked savings scheme) funds have risen one notch to become the second most preferred mode. Last year it held third place on the list.

The popularity of ELSS funds can be attributed to the fact that they are transparent, have low cost and have only three-year lock-in period. This duration is the shortest among all lock-ins offered by tax-saving instruments. However, experts add that these carry market-related risks and ideally one should invest in these through SIPs. However, if one needs to wrap up investments for the year in a short window of time, the SIP route might not be possible.

Unit-linked insurance plans (Ulips) is another option that has earned popularity by the virtue of being tax-efficient. Profits registered from ELSS funds more than Rs 1 lakh in a year are taxed at 10%. However, in the case of Ulips, the maturity gains are tax-free under Section 10(10d). However, the tax-free status comes with a small rider – the life cover is at least 10 times the annual premium.

Ulips offer another flexibility. The policyholder can switch from a debt to an equity fund and vice versa without triggering any tax implication.

Compared to the NPS, Ulips have an advantage too. Funds are not locked till retirement in Ulips and withdrawals are free from tax. Experts urge the people to remember that the Ulip is a long-term instrument but one has to continue with the policy for the full term.

The Senior Citizens’ Saving Scheme (SCSS), which has seen a spurt in investments in FY24, thanks to raising of the ceiling of investment, carries an interest rate of 8.2% and is often reckoned as the optimum investment option for anyone above 60. This year the applicable interest rate was hiked from 8% to 8.2%.
Just in the first half of this financial year, collection under this scheme has surpassed Rs 1 lakh crore