NPS, ELSS and other such tax saving instruments are evaluated by investors during the last quarter of the financial year. NPS, popularly known as National Pension Scheme is a Government scheme where individuals can invest during their earning years so that they receive a pension upon retirement. NPS offers multiple tax benefits under section 80C and 80CCD (1B).

On the other hand, an ELSS – Equity Linked Savings Scheme is a tax saving mutual fund where you can save an amount of up to Rs. 1.5 lakhs under section 80C in a given financial year. ELSS is a diversified equity mutual funds with its majority of corpus invested in the equity market. In ELSS investment, the selection of fund is purely done by the investor, and it by default comes with a lock in period of 3 years. After 3 years, you can either hold or sell the fund.

Analysis between NPS and ELSS

• Lock in period – NPS comes with a lock in period up to retirement, while ELSS has a lock in period of 3 years
• Minimum Annual Investment – Under NPS, as an initial contribution you can invest up to Rs. 500 and during the entire year, the minimum investment amount is Rs. 6000. On the other hand, the minimum amount of investment for ELSS is Rs. 500 which can either be paid in lump sum or through an SIP investment
• Asset Allocation – Under NPS, a maximum of up to 50% is invested in equity and the rest is distributed amongst government bonds, treasury, etc. In the case of ELSS, the entire amount is allocated to equity in a diversified manner which is monitored regularly
• Expected rate of return – For NPS, the expected rate of return is low to moderate, while for ELSS it is high
• Tax Benefits – Investments under NPS can claim tax deduction up to Rs. 1.5 lakh p.a. and an additional Rs. 50000 under section 80C and 80CCD respectively. For ELSS investors, an amount of up to Rs. 1.5 lakh can be claimed for tax deduction under section 80C

NPS is considered to be a long term investment option, backed by the government. However, one of the drawbacks is that the returns offered by NPS are limited since the equity exposure is 50%. The limitation on lock in period makes it less attractive for the investors. On the other hand, ELSS has a short duration lock in period of 3 years, after which you can withdraw money any time that you want. One of the key highlights is that there’s no tax applicable while withdrawing. Also, since the equity exposure of ELSS is higher, the returns expected are also better in comparison to NPS.