Which is the Better Tax Saving Scheme, NPS or ELSS?

Which is the Better Tax Saving Scheme, NPS or ELSS?

When you get a good appraisal from your employer for working your fingers to the bone, well, that’s a reward you deserve all right. But you are shocked to see that your in-hand salary is almost the same.  A substantial portion of your CTC gets deducted as income tax.

The Indian government permits tax benefit via various investment schemes. Here, your money grows and you get tax-exemption as well. Two such investment schemes that help you save tax are NPS and ELSS.

What is the National Pension Scheme (NPS)?

NPS is a government-backed pension scheme for those working in public, private or unorganised sectors. Under NPS, you can make regular contributions during your employment years and receive a pension after retirement. Also, you can get tax benefits up to RS.1,50,000 under Section 80C and an extra deduction by investing Rs.50,000 under Section 80CCD(1B). You can go for NPS investment online as well. Prepare the groundwork by selecting the best NPS pension fund.

What is the Equity Linked Savings Scheme (ELSS)?

ELSS is an equity-linked tax-saving mutual fund scheme. ELSS helps you save up to Rs.1,500,000 on your income tax. You get tax benefits during the period of contribution in ELSS and simultaneously receive a corpus when the fund matures. It has a lock-in period of three years. Under ELSS, a long-term capital gain exceeding Rs.1Lakh is taxed at the rate of 10%.

A Comparative Study of NPS and ELSS:

Although both NPS and ELSS are tax-saving investment instruments, these are not the same:

1. Money invested in: 

A maximum of 50% of your NPS investment online is put into equity and the rest is utilised to buy government bonds, t-bills, etc. 

In the case of ELSS, your money is entirely put into equity.

2. Liquidity:

You can opt for premature withdrawal even in one of the best NPS pension funds only after 10 years of investment. You can withdraw the entire amount only if it is less than Rs.1lakh. Partially withdrawal of 25% of the invested amount is allowed after three years in case of emergency.

There are no restrictions on premature withdrawal from your ELSS funds after three years. 

  1. Post-retirement income:

You have to allot 40% of your investment in buying an annuity in NPS. This generates post-retirement income, which, however, may not be able to keep up with inflation.

In ELSS, you can initiate a systematic transfer of the invested amount to your equity fund and redeem a certain sum each month starting from 2-3 years before retirement.

3. Lock-in period:

NPS has a lock-in period till retirement.

ELSS has a lock-in period of 3 years.

4 . Minimum annual investment amount:

NPS allows a minimum of Rs 500 as an initial contribution every year.

ELSS allows a minimum annual investment of Rs 500 in the SIP or Lumpsum route.

5. Tax exemption:

In NPS, the maturity amount is partially taxable.

In ELSS,  a long-term capital gain exceeding Rs.1Lakh is taxed at the rate of 10%.

Which one is a better tax-saving tool—NPS or ELSS?

While a minimum of 40% of the NPS maturity sum (tax-free) has to go towards buying annuities (interest income is taxed), the rest can be withdrawn (fully tax-free like PPF and EPF). Zeroing in on the best NPS pension fund is crucial here.

 On the other hand, if you redeem equity mutual funds, you have to pay an LTCG tax of 10%, applicable for gains exceeding Rs 1 lakh in a financial year – which makes it a poorer choice in comparison. 


Tax saving should be a critical checklist item for you when you begin your financial planning. Sound knowledge and a wise strategy will certainly see you through. You can opt for an NPS investment online.

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