What is the Difference Betweem NPS and ELSS?

What Is NPS?

What Is ELSS?

What Are the Difference between NPS and ELSS?

The following table illustrates the difference between NPS and ELSS:

Point of difference

National Pension Scheme (NPS)

Equity Linked Savings Scheme (ELSS)

Minimum Investment Amount

For Tier I: ₹ 1,000 and for Tier II: ₹ 250.

₹ 500 as SIP or a lumpsum payment.

Cost

The cost is very low, 0.1% management charge, making it the least expensive managed fund for retirement planning.

Cost is quite high in comparison to NPS. The expense ratio ranges from 0.5% to 1.50%

Lock-in Period

Retirement age or 60 years (whichever is earlier). Can also be extended to 70 years.

3 years after starting the account.

Transparency

Transparency is lower as investors cannot see the fund allocation made by the fund manager.

ELSS mutual funds disclose asset allocation every month.

Asset Allocation

NPS asset allocation is one-half in government securities, corporate debt and other debt instruments. The remaining half is invested in equity shares.

ELSS is equity investment. Therefore, at least 65% of its asset allocation is made in equity shares in stock market listed companies. The remaining portion is invested in other financial debt instruments.

Tax Benefits

Tax exemption is up to ₹ 2 Lakhs under Section 80C and 80CCD.

Tax exemption is up to ₹ 1.5 Lakhs under Section 80C.

Risks

Risks are lower since a small portion is invested in the equity market.

Risks are higher, being exposed to the equity market.

Flexibility

Flexibility is lower as the lock-in period of Tier I is up to the retirement age of 60 years.

Flexibility is greater since ELSS has the shortest lock-in period (3 years) among all the tax-saving investment schemes.

Who Should Invest in NPS?

Who Should Invest in ELSS?

NPS Vs ELSS - Which one is better?

FAQs about NPS Vs ELSS

What are two of the main disadvantages of investing in NPS? up-arrow

Some of the main advantages of NPS are:

  1. It does not have the opportunity for a very high return as there is a restriction of a maximum of 50% of the asset allocation towards equity shares.
  2. The returns are not guaranteed even after being a government scheme. This is because the corpus is accumulated using the earnings from government assets, corporate bonds, and stocks.

Between NPS and ELSS, which one is better for long-term and short-term financial goals? up-arrow

ELSS is a better option for both long-term as well as short-term goals. This is because they only have a 3-year lock-in period as opposed to NPS. After this period, you can either withdraw or extend your account per your goals. Moreover, the major allocation in equity shares allows ELSS to offer a much higher return than NPS. Thus, it is more convenient for meeting short-term goals.

How much money can I invest in NPS to get the maximum tax benefits? up-arrow

As per the tax rules for NPS, the contribution you make towards your NPS in Tier I are deductible from your income as per Section 80CCD(1) and Section 80CCD(1B). Therefore, A Tier I NPS account can hold up to ₹ 2 Lakhs annually and you can claim a deduction for this entire amount, ₹ 1.50 Lakhs as per Section 80CCD(1) and ₹ 50,000 as per Section 80CCD(1B).

Can I invest in both NPS and ELSS? up-arrow

The purposes of investing in NPS and ELSS are different. However, you can invest in both. For instance, if you are a disciplined investor, you can invest a major part of ₹ 1 Lakh in ELSS. Additionally, another ₹ 50,000 can be invested in NPS to get the tax benefit of a total of ₹ 2 Lakhs.