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Taxes can significantly reduce your income. Therefore, effective tax management must be a critical aspect of your financial plan. In India, there are ample tax-saving investment options.

The most popular include the National Pension System (NPS) and Equity Linked Savings Scheme (ELSS).

Both are impactful in securing your future and reducing tax burden. However, both are different from each other in many aspects.

This article delves into NPS vs ELSS so you can know which is better for your financial goals and make an informed investment decision.

What is the National Pension System?

The National Pension System (NPS) is a social security programme backed by the Central Government in India. It is a retirement savings scheme with a long-term investment horizon. The Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government regulate it. You can join the scheme if you are an Indian citizen between 18 and 70 years old.

Under the scheme, your money is invested in different assets, including equity, corporate debt, government securities, etc. The equity exposure is currently capped at 50% - 75%. It gradually decreases as you age, aligning with your risk profile.

You can withdraw a portion of your savings as a lump sum upon retirement. However, the remaining must be used to purchase an annuity. However, according to the new rules, the entire corpus can be withdrawn if it is less than or equal to ₹5 lakhs.

The two accounts under the NPS include Tier I and Tier II. The Tier I account is the basic NPS account and is mandatory. It has a lock-in period until your retirement. The Tier II account is voluntary. It does not have any lock-in period or withdrawal restrictions. However, you can open a Tier II account only when you have a Tier I account.

Tax benefits are available under Section 80C of the Indian Income Tax Act for the money invested in Tier I.

What is an Equity Linked Savings Scheme?

The Equity Linked Savings Scheme (ELSS) is another efficient tax-saving instrument. It is an open-ended mutual fund programme that invests at least 80% of the corpus in equity instruments.

ELSS ensures diversification across different sectors, market capitalisations, and themes. The fund managers conduct extensive research before picking stocks to optimise long-term wealth appreciation.

The returns from ELSS are market-linked and, therefore, not guaranteed or fixed. However, investing in the scheme can give higher returns in the long run.

It has a 3-year lock-in period, which is relatively shorter than other tax-saving options. The fund does not have any maximum tenure.


NPS and ELSS are efficient tools to achieve your financial goals. Both pool money from investors and invest according to predetermined asset allocation. Professional fund managers manage the portfolio and strive to accelerate wealth creation.

Here is a quick comparison between the two schemes to know their key differences:

Parameter  NPS  ELSS
Type of investment  The investment is in various asset classes such as government securities, equities, corporate bonds, etc., aiming for diversification and gradual growth of funds  The investment is primarily (minimum 80%) in equity and equity-related instruments aiming for higher returns 
Lock in period  The lock-in period is longer, which goes up to retirement or the age of 60 years, whichever is earlier. This helps you to save for long-term financial goals. You can extend it to 70 years also. The lock-in period is three years. This ensures liquidity and helps you to save for short or long-term goals 
Minimum yearly investment  The minimum annual  investment for a Tier-I account is ₹1000, and for a Tier-II account is ₹250 The minimum annual investment is ₹500, either in a lump sum or SIP
Returns  The returns from NPS may be comparatively lower but stable  The scheme has the potential to generate higher returns, allowing you to accumulate greater wealth corpus 
Risks  NPS offers you a diversified portfolio which lowers the market risks  ELSS involves a greater equity exposure, which increases the market risks
Withdrawals  You can partially withdraw funds up to 25% of the amount invested after a 3-year lock-in period. A maximum of three withdrawals are allowed during the entire tenure for specific purposes only You can withdraw the entire corpus after the 3-year lock-in period 
Tax advantages  You can enjoy tax benefits of up to ₹2 lakh under Section 80C and Section 80CCD (1B) of the Income Tax Act,  1961 You can enjoy tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961
Transparency  Not transparent when it comes to asset allocation. You cannot know about the fund allocation done by the fund manager.  More transparent since asset allocation is disclosed every month  

Should you invest in NPS?

NPS is one of the most popular tools to ensure financial security post-retirement. It is a great choice if you have a low-risk appetite and wish to save regularly for retirement. There is also a potential to earn higher returns since a part of your corpus is invested in equities.

You can also change the fund manager if dissatisfied with the fund's performance. The scheme also allows you to save on taxes. You can enjoy tax deductions of up to ₹2 lakhs under Sections 80C and 80CCD (1B) of the Income Tax Act, 1961.

So, is NPS worth investing in? Yes. It is a worthy investment tool to ensure a secure and stable old age. If your income comes under a high tax-paying slab, NPS can significantly reduce your tax outgo. However, evaluate your financial goals, cost of living and risk tolerance before investing.

Should you invest in ELSS?

ELSS is suitable if you aim to earn higher returns and save on taxes under Section 80C of the Income Tax Act. However, the scheme involves higher market risks since most of your money is invested in equities. So, go ahead only if you have a high-risk tolerance.

Investing in ELSS can help you generate better returns over time than many other traditional tax-saving instruments. Also, it offers greater liquidity than NPS. You can extend or liquidate your account after the lock-in period ends.

In Conclusion

NPS and ELSS are robust investment tools for achieving financial goals. NPS is ideal for long-term goals such as retirement planning. It allows you to invest regularly and generate stable returns while saving on taxes.

However, the scheme comes with a lock period until 60 years of age or retirement, whichever is earlier.

On the other hand, ELSS is a good option to fulfil your short or long-term goals. It can generate higher returns than NPS while helping you save on taxes. Also, the lock-in period for the scheme is shorter than other tax savings tools.

However, it is crucial to evaluate your financial goals, risk appetite, and investment horizon before investing in any scheme. Make sure the scheme and its returns align with your requirements.

Tax-Saving Under Section 80D with Medical Insurance

Another crucial tool to invest in is a health insurance plan. Amid the rising costs of healthcare services, medical insurance can ensure financial security during a health crisis.

At Tata AIG, you can choose from various medical insurance plans such as individual health insurance, family health insurance, critical illness insurance, etc. and enjoy cashless health insurance facilities at hospitals in India.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

Is it worth investing in NPS for tax savings?

Is it worth investing in NPS for tax savings?


Yes, NPS is an excellent way of reducing your tax outgo. It can help you claim tax deductions of up to ₹2 lakh under Section 80C and Section 80CCD of the Income Tax Act.

Which is better, NPS vs mutual fund?


NPS and mutual funds are two different investment tools. It is essential to analyse the key differences between both and your risk appetite to make an investment decision that aligns with your financial goals.

Can I invest in NPS and ELSS?


Yes, you can invest in both NPS and ELSS. However, the purpose of both schemes is different.