ELSS vs PPF vs ULIP vs NPS — Which One Saves Extra Tax To Build More Wealth?

Long-term wealth creation requires strategic planning. Hence, it is crucial for taxpayers to pick the right investment instrument to ensure that money grows steadily. Each investment tool comes with its own level of risk, return, tenure, and tax benefits.

Understanding these differences can help one create a balanced portfolio that matches their goals. Equity-based options may offer higher growth, while fixed-income products provide stability. Another important factor to consider is the tax implications.

An assessment of the way different investments are taxed can significantly impact net returns. Some instruments offer tax deductions, while others provide tax-free growth or tax-free withdrawals. By knowing the features of different instruments, one can plan efficiently and avoid unnecessary liabilities.

Assuming that you wish to pick an instrument to save money over 15 years, you can consider options such as ELSS (Equity Linked Savings Scheme), PPF (Public Provident Fund), ULIP (Unit Linked Insurance Plan), or NPS (National Pension System). These instruments vary in features, risks and tax implications. 

Let’s see how all these instruments can help in wealth accumulation with an investment of Rs 1.5 lakh per annum for 15 years (similar to PPF).

ELSS is a tax-saving mutual fund that invests mainly in equities. Typically, it has a three-year or more lock-in period. The returns in this scheme are linked to market performance, but historically, such funds have been able to generate at least 12% average returns annually.

SIP monthly amount: Rs 12,500

Investment duration: 15 years

Expected rate of return: 12%

Invested amount: Rs 22,50,000

Estimated returns: Rs 40,57,199

Total value: Rs 63,07,199

Under Section 80C of the Income Tax Act, 1961, taxpayers can claim deductions for up to Rs 1.5 lakh per annum on ELSS investments.  However, the gains under this scheme, exceeding Rs 1.25 lakh in a financial year, are taxable.

PPF is a government-backed savings scheme that provides guaranteed returns. It comes with a 15-year lock-in period. Taxpayers can claim benefits on PPF investments under the overall 80C limit of Rs 1.5 lakh per annum. The returns and maturity corpus are also tax-exempt. Currently, it comes with guaranteed returns of 7.1% per annum.

Investment per year: Rs 1.5 lakh

Time: 15 years

Total investment: Rs 22,50,000

Return: 7.1%

Interest Earned: Rs 18,18,209

Maturity Amount: Rs 40,68,209

ULIPs combine insurance and investment in one product. Part of the premium provides life cover, while the rest is invested in market-linked funds. Returns can vary according to the market performance. However, even if the fund generates higher returns, it may not entirely reflect in your corpus value. This is because ULIPs have hidden internal chargers that can diminish returns.

Assuming 90% of the investment goes towards growth, while the remaining goes into insurance, our calculation will be:

Investment: Rs 1,35,000

Investment duration: 15 years

Expected rate of return: 10%

Invested amount: Rs 22,50,000

Invested amount (including insurance): 20,25,000

Estimated returns: Rs 26,93,213

Total value: Rs 47,18,213

For policies issued after 2021 with an annual premium over Rs 2.5 lakh, the maturity proceeds are no longer tax-exempt. Moreover, premiums paid towards ULIPs are eligible for a tax deduction under Section 80C.

NPS is a retirement-focused investment plan. It allows investment in equity, corporate bonds and government securities. Under NPS, one can withdraw up to 60% of your accumulated corpus as a lump sum, and the remaining 40% must be invested in an annuity to provide a regular pension. Historically, NPS funds have given around 10% average annual returns.

Investment amount: Rs 1,50,000

Investment duration: 15 years

Expected rate of return: 10%

Invested amount: Rs 22,50,000

Estimated returns: Rs 29,92,459

Total value: Rs 52,42,459

A total of 60% of this value, which amounts to Rs 31.4 lakh, can be withdrawn on maturity entirely tax-free. The remaining Rs 21 lakh will be used to provide one with a monthly pension amount that will be treated as a regular income and taxed according to the your applicable tax slab.