When it comes to creating a retirement corpus, it is essential to consider the different options available and choose the one that best fits your financial goals and risk appetite. The National Pension System (NPS) and Equity-Linked Savings Scheme (ELSS) are two such options that are often considered by investors. While both these schemes offer tax benefits and help in creating long-term wealth, they work in entirely different ways. Read more to find out some key factors to consider when choosing between NPS and ELSS for your retirement planning.

What is ELSS?

Equity-Linked Savings Scheme (ELSS) is an equity investment option that functions like any other mutual fund but with the added benefit of tax savings. It invests primarily in equities and investors have different options to choose from, such as large-cap, mid-cap, and small-cap funds. However, unlike other mutual funds, ELSS comes under section 80C of the Income Tax Act, which means that investments made in ELSS can be claimed as a deduction from taxable income, up to Rs 1.5 lakh. This translates into significant tax savings for investors. The lock-in period for ELSS is three years, which means that investors cannot withdraw their funds before the completion of the lock-in period.

What is NPS?

The National Pension System (NPS) is a defined-contribution pension system that is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) in India. It is open to employees from the public, private, and even the unorganized sectors, ie. for individuals, and offers a convenient and flexible way to save for retirement. NPS tax benefits make it an attractive option for those looking to secure their financial future and create a sustainable income stream after retirement. One of the key benefits of NPS is that it allows for partial withdrawal of a certain percentage of the corpus at retirement, while the remaining amount is distributed as a monthly pension. Additionally, NPS also offers tax benefits to subscribers under Section 80C Section, 80CCD (1B) and 80CCD(2) of the Income Tax Act, which makes it a viable investment option for individuals looking to save tax while planning for their retirement.

NPS vs ELSS – four key differences 

  • NPS offers exclusive tax benefit of upto Rs. 50,000 FY over and above the standard 80C capped at Rs. 1.5 lakhs FY. ELSS tax benefit, on the other hand, is to be accommodated in 80C capped at Rs. 1.5 lakhs FY.
  • NPS is a pension product designed solely for retirement planning, while ELSS is a mutual fund product that is designed to provide capital appreciation over the long term.
  • The exit/withdrawal for NPS is until the investor turns 60 years old in most common way, while for ELSS it is 3 years.
  • NPS has lower expenses as compared to ELSS, ranging from 0.25% to 1.50% of the investment amount while ELSS expenses ranges from 1.5% to 2.5%.
  • NPS offers flexibility in terms of investment options, i.e., active choice and auto choice which includes any combination between equity, corporate bond, government security and alternative investment fund (AIF) and seamless multi PFM options


Thus, while NPS and ELSS have some similarities, such as tax-saving benefits and long-term investments, there are several key differences between them. It is important to understand these differences before deciding whether to open an NPS account or invest in ELSS.