Tax savings are important for anyone who earns money and pays taxes every year. When it comes to choosing tax-saving investment options, NPS and ELSS are two of the most common names. Many people get confused because both help in tax deductions under Section 80C. But there is a clear tax saving difference between them.
This guide will help you understand what NPS and ELSS are, how they work, how they offer tax benefits, and what to choose depending on your goals. The idea is to understand the tax saving difference step-by-step in a very simple way.
What Is ELSS (Equity Linked Savings Scheme)?
An ELSS or Equity Linked Saving Scheme is a kind of mutual fund that mostly invests in equity shares (stocks of companies).
Key points,
- It has a 3-year lock-in period attached
- It is linked to the market
- The returns vary according to the performance of the market
- Tax benefits under section 80C
- It has a higher risk-return ratio
Reasons for choosing ELSS?
- The shortest lock-in period among all the available tax-saving options
- Excellent growth potential in the long term
- SIP (even ₹500 a month) makes it easy to invest
What is NPS (National Pension System)?
NPS is a government-run retirement investment plan.
Key points,
- It is a retirement-related product for the long term
- Only the specified rules allow partial withdrawal
- The investment goes into equity + bonds + government securities
- The pension is given to you after you retire
Reasons for choosing NPS?
- It is free of risk and organised for retirement
- Under section 80CCD(1B) extra tax benefit
- Investing will be allowed up to 60 years of age at the max
The Real Tax Benefits Explained
Below is a simple comparison table showing the tax saving difference clearly.
Tax-Saving Comparison Table
| Factor | NPS | ELSS |
| Tax deduction under 80C | Up to ₹1.5 lakh | Up to ₹1.5 lakh |
| Additional tax benefit | Extra ₹50,000 under 80CCD(1B) | Not available |
| Lock-in period | Till age 60 (partial exit allowed) | 3 years |
| Tax on returns | Partially taxable | Subject to capital gains tax |
| Tax suitability | Best for salaried individuals | Best for market-linked growth |
So, when you compare, you will clearly notice the tax saving difference due to that additional ₹50,000 benefit in NPS.
How Withdrawal Tax Works
NPS taxation
- On retirement, 60% of your total maturity amount is tax-free
- 40% goes into the pension, which is taxable as income yearly
- Pension paid out each month is income-taxed just like salaries are
ELSS taxation
The imposition of tax is as per the Capital Gains Tax.
- In the case of profits exceeding ₹1 lakh in a single financial year, the tax is raised at 10%
- No tax-advantaged adjustment
This is a tax-saving factor that investors should keep in mind. NPS tax is deducted at the time of pension, whereas ELSS taxes are imposed only when the redemption takes place.
Return Comparison
There will be a difference in returns, but we can consider the historical average performance for reference.
ELSS average return range
12% to even above 15%+ for a long-term
NPS average return range
9% to 12% depending on the allocation
Risk-free as not entirely reliant on equity. Therefore, in terms of growth, ELSS comes out to be a better option.
Which Plan Is Better For Whom?
Select ELSS if,
- You are after larger profits
- You desire the option of withdrawing money anytime
- You favour the least lock-in periods
- You can take the risk in the market
Best suitable for,
- Young professionals
- People looking to invest for a short to medium period of time
- Beginners
Select NPS If,
- You are into a planned, disciplined retirement savings
- You want a certain level of retirement fund
- You wish to claim a tax deduction benefit of ₹50,000
- You are not interested in making early withdrawals
Best suited for,
- Employees having a monthly salary basis
- Those who are thinking of future retirement savings
- People needing significant tax-saving components
| Feature | ELSS | NPS |
| Investment freedom | High | Low (because of lock-in) |
| Risk | Higher | Moderate |
| Liquidity | Easy | Restricted |
| Returns | Higher potential | Stable growth |
| Tax benefit | 80C | 80C + 80CCD(1B) |
Which Option Gives Better Tax Benefits?
Under Section 80C, the tax benefits for both are the same. However, NPS allows an additional deduction of ₹50,000. ELSS, on the other hand, does not offer the same benefit.
Thus, based solely on the deducted tax, NPS is the winner.
This tax saving difference between NPS and ELSS is very clear now.
Can You Invest in Both Scenarios?
For sure, you definitely can.
A clever way that many professionals stick to:
Step 1
Put ₹1.5 lakh in ELSS (to get both returns + tax benefit under Section 80C)
Step 2
Invest ₹50,000 in NPS (to avail of the extra deduction)
The result will be,
- Accumulation of wealth over a long period
- Overall tax deduction to the maximum
- Risk and safe retirement income are perfectly balanced
Conclusion
The tax saving difference between NPS and ELSS mainly depends on withdrawal rules, lock-in, and overall tax deductions. NPS gives an extra deduction benefit of ₹50,000, making it a great choice for salaried people and long-term planners. ELSS is suitable for investors who want faster access to money and higher growth potential.
The ideal way is to either choose NPS when your goal is retirement + maximum tax savings
Or choose ELSS if your goal is fast money growth and flexibility
The best strategy, if possible, is combining both so you enjoy high returns, tax savings, and future security.
