ELSS vs NPS: Which One is Best for You?

Reducing taxable income is an important aspect of financial planning and wealth creation. NPS and ELSS are two investment options that taxpayers can use to decrease their tax liabilities. By investing in mutual funds, you can fulfill your financial goals. Investing in mutual funds not only gives you the opportunity to benefit from capital appreciation, but also from tax deduction. While there are many investment options that offer tax benefits, in this article we will draw comparison between two popular schemes – ELSS vs NPS Scheme – that offer tax deductions under Section 80C of the Income Tax Act, 1961.  

ELSS vs NPS: Which One is Best for You?

Equity Linked Savings Scheme (ELSS)

ELSS or Equity-Linked Saving Scheme (ELSS) is a type of diversified equity mutual fund scheme that comes with a lock-in period of three years. The long-term capital gains over Rs. 1 lakh from these schemes is taxed at the rate of 10%. They offer tax benefits up to Rs. 1,50,000 in a financial year under Section 80C.  

Benefits of Investing in ELSS

Here are benefits of ELSS that make it more attractive than other investments offering tax benefits under Section 80C:

  • ELSS is a tax-savings investment scheme where investors can claim up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961.  
  • ELSS funds have the shortest lock-in period of 3 years of all Section 80C investments. 
  • Since ELLS are equity-linked mutual funds made of a portfolio of various stocks, the overall investment portfolio is diversified which mitigates risks and offers good returns. 

National Pension Scheme

The National Pension Scheme (NPS) was introduced and is backed by the government in which people can invest during their employment to get a pension later when they retire. By investing in NPS, you can get a tax deduction of Rs. 1,50,000 under Section 80C of the Income Tax Act and an additional tax deduction of Rs. 50,000 u/s 80CCD (1B). 

Benefits of investing in NPS

Here are key benefits of investing in the NPS:

  • NPS funds can be seamlessly transferred across various jobs and locations. Unlike many other pension schemes, NPS can be easily arranged by individuals upon moving to a new job.
  • NPS is a government-backed scheme which is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It ensures transparent investment norms, performance reviews, and fund managers regularly monitor the fund through NPS trust. 
  • NPS offers dual benefits – your pension wealth accumulation grows with the compounding effect until the retirement age and the account maintenance charges are low. 
  • Investors can open an NPS account via the eNPS portal and easily manage it online.


Here are some key differences between NPS and ELSS: 

Tax benefitsELSS investments offer tax benefits of Rs. 1.5 lakh u/s 80CNPS subscribers can claim tax benefits of Rs. 1.5 lakh u/s 80C and additional tax deduction of Rs. 50,000 u/s 80CCD (1B)
Lock-in periodELSS has the shortest lock-in period as compared to other investments offering benefits u/s 80CNPS is locked until retirement or until the subscriber reaches the age of 60, whichever comes later
Minimum investment ELSS investors need to contribute a minimum amount of Rs. 500 as lump sum or SIP (each SIP needs to be Rs. 500) per annumFor Tier-I account, the minimum annual contribution must be Rs. 1000 (pension) and Rs. 250 for Tier-II account (investment)
Money invested inAs the name suggest, large proportion of the corpus (at least 80%) is invested in equity stocksNPS funds is invested in equity, corporate debt, government securities and alternate investment funds
LiquidityELSS funds have a lock-in period of 3 years and cannot be prematurely withdrawn before 3 yearsYou can withdraw the fund before maturity within a specific limit and under the condition of purchasing an annuity
Associated riskRiskier than NPSSubject to market risk but less risky than ELSS

Like resident investors, NRIs can also invest in mutual funds and NPS to secure their retirement financially. 

National Pension Scheme and ELSS schemes have many common features and differences. Individuals can choose between them based on their financial goals and risk appetite. If you are investing to ensure a happy retirement without taking much financial risk, NPS must be your option. ELSS are suitable for investors who have a high-risk tolerance, short-term financial goals and are looking for flexible investment options.

NRIs willing to invest in NPS or ELSS schemes in India must consult market experts to make informed decisions. You can get detailed mutual fund advisory from experts at SBNRI. You can download SBNRI App from the Google Play Store or App Store to ask any questions related to mutual fund investment, NRI account opening online and tax filing in India. To ask any questions related to Mutual Funds, click on the button below. Also visit our blog and YouTube channel for more details.

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