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Direct Tax Code (DTC) : NPS May Replace ELSS Mutual Funds As Tax Saving Investment


Did you think how are you going to avail the tax benefit after Direct Tax Code come into effect. Currently most of the people prefer to invest under tax saving ELSS mutual funds to get the tax exemption. As ELSS mutual funds are covered under section 80C of income tax act, which allows you to put your funds under ELSS to avail the tax benefit of the same amount upto Rs 1 lakh from your taxable income every year.

As per proposed DTC, Equity Linked Saving Schemes (ELSS) mutual funds will lose its most attractive feature i.e tax saving benefit. Which means investment under ELSS mutual funds will not offer any tax benefit to its investors after DTC.



What Is The Best Alternate Investment Of ELSS When Proposed DTC Comes Into Effect?

As of New Pension Scheme (NPS) looks a best alternative of ELSS as tax saving instrument. As proposed DTC may impose EEE taxation policy on NPS and this may be one of the investment instrument which will be eligible for tax deduction upto Rs 1 lakh once DTC will come into effect.

What All Benefits Will Come With The Revised DTC On NPS?
Tax Benefit

As Per Income Tax Act 1961

Currently withdrawal made by the investor attracts tax which deducts a substantial amount of money from the life time invested sum of the investors.

As Per Proposed DTC

with the proposed DTC it is expected that government may impose EEE method of taxation over NPS under which contribution, interest and withdrawal all will be exempt from tax for the investors.

What Is The New Pension Scheme?

New Pension Scheme (NPS), launched by the government of India on 1st April 2009 for non government employees. Any one working under any stream can invest under NPS where investor need to contribute funds every months under the scheme during the working years, which is then invested as per the preference of the investor.

Sum invested under NPS can be withdrawn by the investor on retirement (on or after 60 years of age).

What Are The Advantages Of New Pension Scheme (NPS)?
  • Lowest Charges :- NPS has the lowest fund management charges, administrative charges, account opening charges, annual maintenance charges and transaction charges which saves lots of amount of the investor investing under NPS.
  • Tax Benefit :- Contribution made under NPS is tax free for the investors.
  • Switch Between Fund Managers :- Investor putting funds under NPS are allowed to switch between fund managers handling NPS investments. Which means if you are not satisfied with the performance of the funds you are invested in then you can switch to some other fund manager without any tax implications.
  • Government Contribution :- To promote NPS, government of India have decided to contribute Rs 1000 every year to for everyone who joins the New Pension Scheme.between 1st April 2010 to 31st March 2011. This will simply add Rs1000 in your NPS account every year for next 3 years if the investment amount is between Rs 1,000 – Rs 12,000 p.a.
  • Returns :- NPS investment under stock market generates better returns than other long term investment products.
  • Regular Flow Of Income After Retirement :- NPS helps you save for your future and investment under annuities provides a regular flow of income to the investor.
What Are The Drawbacks Of New Pension Scheme (NPS)?
  • Compulsory Withdrawal :- People investing under NPS are required to withdraw their entire contribution between the age of 60 to 70 years.
  • Lack Of Transparency :- People investing under NPS cannot decide in which NPS fund they should invest into as there is no way to check the historical performance of NPS funds.
  • Mode Of Payment :- The only way to make payment for NPs is through cheque. No other facilities are available like online fund transfer etc.
  • Compulsory Purchase Of Annuity :- In case of early retirement investor have to purchase a annuity from an insurance company compulsorily.
  • Restricted Asset Allocation :- Investor can invest only 50% in equities. As we all know investing in equities generates good returns as compare to other investments.
Is Tax Benefit On ELSS Will Continue After DTC?

Latest draft of DTC did not include ELSS as tax saving instrument, which means after DTC investment under ELSS will not offer any tax benefit to the investor. Final draft may include ELSS into the tax saving instrument category – so we better wait for the final draft before jumping to a final conclusion.

Which Section Of DTC Will Offer Tax Benefits to The Individuals?

After DTC, section 80C of income tax act will be replaced with section 66 which will offer tax benefits to the individuals.


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