ELSS Vs. NPS: 26 Differences, Features, Tax Benefits

With financial year coming to end, many individuals must be rushing to invest money in order to get tax benefits under the new Section 80C of Income Tax Act 1961.

Everyone wants to gain as much as return possible through the investments made as all types of investments made to get section 80C benefits has a mandatory lock-in period which is varying. However with range of investment options available in the market; where to invest is the common question amongst tax payers.

There are broadly two categories of investment instruments:

The first option is highly recommended for conservative investors who are ready to earn small but guaranteed returns whereas the second option is for people who are ready to take risk their money with an objective of earning high return along with tax benefits.

In this article we’ll discuss the differences between Equity Linked Savings Scheme (ELSS) and National Pension Scheme (NPS) with both having risks associated due to the equity exposure.

While ELSS has been a favorite amongst investors because of highest return in a short period of time, since it has lock-in period of just 3 years with an option to continue further in the same fund. However recently, NPS has also started gaining interest amongst long term investors wanting to safeguard financials during retirement as portion of money is invested in equity, although small, and what option they really choose.

Following table shows the feature comparison of NPS and ELSS:

FeatureNational Pension System (NPS)Equity Linked Savings Scheme (ELSS)
Type of schemePension schemeMutual fund scheme
Primary objectiveProviding security and pension to all Indians after retirementSave tax
Who is the sponsorer?GovernmentMutual fund houses
Section 80C BenefitYesYes
Lock-in PeriodTill retirement. i.e. until investor reaches 60 years of age3 Years
Amount of tax deduction that can be claimed1.5 Lacs1.5 Lacs
Tax TreatmentEET (Exemption on investment, Exemption on return, Taxation on redemption)EEE (Exemption on investment, return, and redemption)
Premature withdrawal possible?Yes. Only upto 25% and only for certain purpose and provided you purchase annuityNo
How many times money can be withdrawn partially?3 times during the tenureWithdrawal not allowed
Additional tax benefit?Yes. Rs. 50000 under Section 80CCD(1B)No
Are the returns guaranteed?NoNo
Are the returns tax free?Only 40% of corpus is tax-freeNo. Entire corpus is tax-free as it is a long term capital gain.
How to invest?Through select fund housesThrough multiple fund houses
Minimum contributionRs. 6000 per year in Tier-I and Rs. 2000 at the end of year in Tier-IIRs. 500 as a lump-sum in a year or every month as SIP
Withdrawn money can be used anywhere?No. 40% should be used to buy annuity, which becomes pension after the retirement and remaining 20% to buy an annuity or withdrawn after paying taxes. 40% of the corpus is tax-free.Yes
Who can invest?Indian citizens above the age of 18 yearsIndian citizens above the age of 18 years
Can NRI invest?Yes. But is useful if NRI settles in India after retirement.Yes
Historically who has offered highest returnAverage 14%Depends on the scheme but average 15%-18%
Who manages the fund?7 pension fund managersFund managers of respective fund house
Best recommended for?RetirementShort term growth
Can you hold investment after lock-in period?Yes. But only Yes
Where is the money invested?Max 50% in equity. And remaining in corporate debt funds (bonds) or government securities.Minimum 80% is invested in equity and remaining in in debt, money market instruments or cash
Can you shift from one fund to another?Yes. But only once a year.No
Can a investor choose where his/her money is invested?YesNo
Can an investor invest in multiple funds?No. Only one NPS account can be opened by a subscriberYes
Does employer also contribute?Yes, under Tier-I accountNo
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