Should you invest in a combination of ELSS and NPS for retirement or is one of them enough?
There is no straight answer to the question and it depends on multiple factors - your investment behaviour and needs being the primary ones. For anyone who is in the accumulation phase and the retirement is away by at least 10 years or more, it is generally advisable to invest in equity as much as possible. Being aggressive in the accumulation phase helps create a larger corpus.
National Pension System (NPS) is a very good option to invest for retirement, especially for those who lack discipline and tend to withdraw their investments meant for retirement every now and then. Check your NPS fund performance. NPS virtually locks your money till the age of 60. Withdrawals before that are allowed only in certain specified situations that also involve a lot of conditions. So it ensures that the money meant for your retirement is safeguarded. Even at the time of retirement, one needs to mandatorily utilise at least 40 per cent of the accumulated corpus for buying an annuity plan. An annuity plan ensures a certain regular income in the form of a pension.
In addition, investment in NPS is eligible for an additional tax deduction of up to Rs 50,000 under section 80CCD (1B) of the income tax act. This is available over and above the Rs 1.5 lakh limit of section 80C and can be availed only by investing in NPS Tier I account. Remember, tax-saved is money earned. However, NPS doesn't allow investing more than 75 per cent in equities.
Equity Linked Saving Schemes (ELSS) on the other hand, invest completely in equities. Also, they score much higher on liquidity when compared to NPS. ELSS have a lock-in period of only three years. But while investing in ELSS for retirement, one must be disciplined enough not to redeem the investments mid-way in the absence of any restriction. Doing so may jeopardise your retirement plan as you may end up with a smaller corpus.
So for a disciplined investor, there is no point in compromising on liquidity and investing just 75 per cent in equity rather than 100 per cent when you are in the accumulation phase and the retirement is far away. Simply utilise the 80C limit of Rs 1.5 lakh by investing in ELSS. There is no harm in investing additional Rs 50,000 in NPS for tax benefit. However, if you are someone who lacks discipline, NPS is the option for you.
To know about the ideal tax-saving plan for you, read Your ideal tax-saving plan.
You can also check out the best tax-saving funds for you.