Diwali, Dhanteras Investments: Can ELSS, NPS, or Gold ETFs Make You Tax-Rich Next Year?

The festive season, especially Dhanteras and Diwali, is often considered an auspicious time to make fresh investments. This period also offers a practical opportunity to start early with tax-saving instruments such as ELSS, NPS, or Gold ETFs, which can not only help in optimising the tax liability but also help in building long-term wealth.

ELSS - Equity-Linked Savings Scheme

ELSS funds are one of the most popular tax-saving options under Section 80C, offering deductions up to Rs. 1.5 lakh per financial year. With a lock-in period of just 3 years, they have the shortest lock-in among 80C options and offer potential for market-linked returns. Historically, equity mutual funds in India have delivered approximately. 10 to 15% annualized returns over the long term, making ELSS an attractive option for wealth creation.

"However, these investments are subject to market risk. Investors should consider ELSS as a medium-to-long term vehicle and avoid making last-minute lump-sum decisions purely for tax-saving purposes. Systematic Investment Plans (SIPs) in ELSS, started during Diwali, can not only spread market risk but also instill investment discipline," said CA (Dr.) Suresh Surana.

It is to be noted that Long-Term Capital Gains (LTCG) above Rs. 1.25 lakh per annum from equity funds are taxed at 12.5% without indexation.

NPS - National Pension System

NPS is a powerful tool for both tax savings and retirement planning. While contributions are eligible under Section 80CCD(1) (part of 80C limit), an additional deduction of Rs. 50,000 is available exclusively under Section 80CCD(1B). This makes it ideal for those looking to go beyond the Rs. 1.5 lakh limit.

"With a mix of equity, government, and corporate bonds, NPS offers a balanced approach toward long-term wealth accumulation. Contributions are tax-efficient, and 60% of the corpus withdrawn at retirement is tax-free," said CA (Dr.) Suresh Surana.

The detailed tax benefits associated with NPS contributions are as follows:

Employee's Contribution to Notified Pension Scheme [80CCD(1)] under old tax regime

Contributions made by employees to the NPS are eligible for tax deduction. However, such deduction would be restricted to the following:

• 10% of salary*, in case of an employee
• 20% of Gross Total Income in case of a self - employed individual.

The above deduction is further subject to the overall threshold limit of Rs. 1,50,000 alongside the deductions available u/s 80C of the IT Act.

Additional Deduction for pension scheme [80CCD(1B)] under old tax regime

An additional deduction [other than those provided in section 80CCD(1)] of Rs. 50,000 can be claimed by the employee for their own contributions to NPS, which is over and above the Rs. 1.5 lakh limit.

Deduction of Employer's Contribution to pension scheme. [80CCD(2)]

When an employer, including those from the Central Government or State Government, contributes to any pension scheme, the entire amount contributed is first taxable in the hands of the employee as Salary Income and thereafter it can be claimed as a tax deduction is subject to the following limits -

• In case of Central Government or State Government employers - 14% of salary*
• In case of other employers - 10% of salary*

However, if an employee opts for the new tax regime, the deduction of 14% of salary* will apply uniformly, regardless of the employer type, according to CA (Dr.) Suresh Surana.

Exemption on Withdrawal from NPS [10(12A), 10(12B) & 10(13)]

Payment received by any taxpayer (Private from NPS Trust on closure of his account or on his opting out of the NPS scheme would be exempt from tax to the extent of 60% of the total amount payable to him at the time of such closure or his opting out of the scheme. Thus, such a taxpayer would be liable to pay tax on the balance 40% of the amount received.

In case of partial withdrawal by the employee from the NPS, the exemption would be restricted to 25% (instead of 60%).

Further, it is pertinent to note that in case of any amount received by any nominal legal heir on the death of the taxpayer, the said amount would be fully exempt u/s 10(13) of the IT Act.

Salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites, stated CA (Dr.) Suresh Surana.

Gold ETFs - New Tax Rules Apply

While physical gold remains a traditional Diwali favourite, investors may also consider investing in Gold ETFs. Gold ETFs, while not eligible for specific tax deductions, can enhance portfolio diversification and act as a hedge against inflation and market volatility.

"When held for more than three years, they qualify for long-term capital gains taxation with indexation benefits, offering efficient post-tax returns compared to physical gold," commented CA (Dr.) Suresh Surana.

The tax treatment of Gold and Silver Exchange Traded Funds (ETFs) depends on the acquisition date and holding period, as per CA (Dr.) Suresh Surana:

For units purchased before 1 April 2023: Gains on holdings up to 36 months are treated as short-term capital gains (STCG) and taxed at the investor's applicable slab rate. Holdings exceeding 36 months qualify as long-term capital gains (LTCG), taxed at 20% with indexation under Section 112.

For units acquired between 1 April 2023 and 31 March 2025: All gains, irrespective of the holding period, are treated as short-term and taxed at slab rates, following the withdrawal of indexation benefits for debt-oriented mutual funds under the Finance Act, 2023.

For units purchased on or after 1 April 2025: Gains from holdings of 12 months or less are treated as short-term and taxed at slab rates, while holdings exceeding 12 months qualify as long-term capital gains, taxed at a flat rate of 12.5% without indexation, as per the amendment made vide Finance (No. 2) Act, 2024.

As such, this Diwali, making strategic investments in ELSS for tax savings and wealth creation, NPS for additional deductions and retirement planning, and Gold ETFs for diversification with evolving tax benefits can collectively improve one's tax efficiency and investment portfolio.

Disclaimer: The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of GoodReturns.in or Greynium Information Technologies Private Limited (together referred as “we”). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.