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ELSS vs NPS – Comparison between ELSS & National Pension Scheme

Updated on: Jan 13th, 2022

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5 min read

Saving taxes is something that everyone would like to do. There are many investment schemes like Equity-Linked Saving SchemeNational Pension SchemeTax saving FDsNSC, and PPF, which offer tax benefits under Section 80C. In this article, we have compared ELSS with NPS.

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Equity Linked Savings Scheme(ELSS)

Equity-Linked Saving Scheme (ELSS), popularly known as ELSS, is a tax saving mutual fund where one can save up to Rs 1,50,000 in a financial year under Section 80C. It has a lock-in period of just three years, the shortest among all tax-saving investment options. Long-term capital gains of over Rs 1 lakh being taxed at the rate of 10%.

National Pension Scheme(NPS)

National Pension Scheme (NPS) is a government-backed scheme in which individuals invest during their earning years to get a pension upon retirement. Investments in NPS offer a tax deduction of Rs 1,50,000 under Section 80C of the Income Tax Act and an additional deduction of Rs 50,000 under Section 80CCD (1B) of the said Act.

Comparative Analysis between ELSS and NPS

 Equity-Linked Savings Scheme (ELSS)National Pension Scheme (NPS)
What is the lock-in period?ELSS has a lock-in period of 3 years.NPS has a lock-in period of up to retirement.
What is the minimum annual investment?You can invest Rs 500 either as a lump sum or as a SIP investment.You can invest Rs 500 as an initial contribution in a year.
What are the tax benefits?You can claim a tax deduction of up to Rs 1.5 lakh p.a. under Section 80C of the Income Tax Act.You can claim a tax deduction of up to Rs 1.5 Lakh p.a. under Section 80C and an additional Rs 50,000 under Section 80CCD (1B) of the Income Tax Act.
Where is the money invested?The entire amount is invested in equity in a diversified manner and is monitored regularly.A maximum of 50% is invested in equity. The rest is distributed in government bonds, treasury, etc.
What about premature withdrawals?Funds invested in ELSS cannot be prematurely withdrawn.You can withdraw prematurely within certain limits and under the condition of purchasing an annuity.
Are the returns taxable?LTCG over Rs 1 lakh is taxable at 10%The maturity amount is partially taxable.

  Even though NPS offers tax benefits of up to Rs 2 lakh a year, as opposed to the ELSS tax benefits of up to Rs 1.5 lakh, ELSS is still the better investment option. The latter provides flexibility and the opportunity to earn higher returns with a lock-in period of only three years.

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Quick Summary

Investment schemes like ELSS and NPS offer tax benefits under Section 80C. ELSS has a 3-year lock-in period, while NPS has one until retirement. ELSS allows partial LCG withdrawal and offers up to Rs 1.5 lakh tax deduction. NPS offers dual tax benefits up to Rs 2 lakh but has higher equity limitations. ELSS is more flexible with higher returns.

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