Difference Between NPS vs ELSS
- 15th September 2025
- 11:00:00 AM
- 8 min read
As of FY25, about 56,32,202 individuals in India chose the National Pension Scheme to secure their future. In the Equity Linked Saving Scheme or ELSS, there are about 1.68 crores investors in 2025.
It shows that Indian investors are increasingly preferring such investment vehicles. However, learning the key differences between NPS vs ELSS can help you with a proper investment decision.
A Quick Overview of NPS
If you are a salaried individual, you must secure your future after your retirement with the National Pension Scheme or NPS.
Announced by the Indian government in 2004, this pension scheme has become one of the trusted approaches of both corporate and government employees to secure their future.
Before delving deeper into the debate between NPS vs ELSS, take a look at how the NPS works:
- It is an investment scheme for you that comes with a longer maturity period (Tier I NPS). Officially, the lock-in period of the scheme applies until you reach the age of 60 years.
- However, a Tier II NPS is also available with no restriction on fund withdrawal.
- When you sign up for an NPS scheme, a fund manager takes care of the fund allocation. They allocate your investments across assets like equities, corporate and government bonds to grow your corpus.
Key Benefits of Investing in an NPS
To distinguish between NPS vs ELSS better, let us first look at the benefits of NPS. It not only secures your future with a lump sum and a regular income stream but also offers financial support with premature withdrawal, helps with tax savings, and is portable between jobs:
- When you reach the age of 60, you can liquidate 60% of the corpus as a lump sum. With the remaining 40% corpus, you should purchase an annuity to establish a steady income stream.
- As an NPS subscriber, you can claim a tax benefit of up to INR 1.5 lakh. Due to your contribution to a Tier I NPS account, you can claim up to an additional INR 50,000 tax deduction.
- The NPS account allows premature withdrawals. After investing for at least 3 years, you can do premature withdrawals for reasons such as higher education, marriage of your children, house construction, etc.
- The NPS scheme, unlike any other pension plan, comes with flexibility. If you change jobs, you can shift your existing NPS account to your new employer effortlessly.
A Quick Glance at ELSS
The Equity Linked Savings Scheme, or ELSS, is one of the mutual funds, and it lets you enjoy a possible capital appreciation with potential return.
Between NPS vs ELSS, if you choose the latter, your fund gets allocated across stocks of public companies and other equity-related investments. An ELSS fund typically follows an aggressive approach to equity investments and allocates 90% to 95% of its funds in equities.
Such an approach makes it a riskier investment option. However, if the underlying assets or equities perform better, there is also a chance of getting a higher return.
Benefits of Investing in an ELSS
Here are 6 crucial benefits you must know about ELSS to differentiate between NPS vs ELSS:
- If you look at the past performance of ELSS investments, investors have made up to 15% return on average in the long term. This highlights its potential to ensure an optimised return for investors.
- The lock-in period of this investment scheme is also low. If you invest in ELSS today, after a 3-year lock-in period, you can withdraw funds from this investment scheme.
- In case something happens to you before the lock-in period is completed, your nominee can redeem funds, provided 1 year has passed post unit allotment.
- You can also secure a loan against the current Net Asset Value or NAV of the ELSS fund units. Typically, you can borrow 50% to 70% of your ELSS fund’s value as a loan.
- Your Investments in ELSS funds are allowed for tax deduction for up to INR 1.5 lakh in a financial year.
- Starting an ELSS investment is also affordable. You can make a lump-sum investment in this investment option with only INR 500. There is no upper limit for a lump-sum investment. The minimum SIP amount for an ELSS is the same as the lump sum.
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Key Difference Between NPS and ELSS for Your Investment Decision
Here are 5 key differences between NPS vs ELSS based on factors like return potential, risk level and more:
| Specifics | National Pension Scheme (NPS) | Equity Linked Savings Scheme (ELSS) |
| Primary fund objective | This aims to create a corpus and gradually grow it over a longer term for post-retirement planning. | This investment option brings you a potential capital appreciation opportunity with tax benefits. |
| Return potential | Since its inception, this investment option has delivered a stable return of 8 to 10% per annum to the investors. | It has the potential to generate 10% to 12% return on average for investors. |
| Level of risks | Tier I NPS allows up to 75% equity and the rest in fixed instruments, making it moderately risky. Tier II allows 100% equity, which is much riskier. | The risk profile here is comparatively higher due to being more focused towards equity investments. |
| Suitable investor type | It is suitable for you if you are aiming to build a retirement fund. | Investors from an early age can start investing in ELSS to get an optimised return with tax benefits. |
| Fund Management | Government-appointed and experienced fund managers manage your fund. This brings peace of mind. | SEBI-registered Asset Management Companies or AMCs are in charge of managing your funds. |
| Steady income stream | Apart from the lump sum amount after retirement, the annuity plan ensures a steady income stream for daily expenses. | There is no annuity option in an ELSS investment plan. However, there is a Systematic Withdrawal Plan or SWP, which allows you to get periodic payments. Also, you can take the lump sum amount after the lock-in period. |
Conclusion
As an investor, you might want to know the differences between NPS vs ELSS to make an informed decision. With an NPS investment, you can shape the financial future after your retirement. It provides a lump sum fund with a regular income stream. ELSS is a riskier investment option but comes with a higher return potential with a short lock-in period.
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Frequently Asked Questions
1. Which is the better approach – ELSS vs NPS?
It depends on your risk tolerance and investment goals. If you want to plan for your financial future after retirement at a moderate risk, go for an NPS. On the other hand, if you want to enjoy potential capital appreciation at a higher risk, opt for an ELSS.
2. Who should not invest in ELSS?
If you are looking for short-term growth or return on investments, an ELSS is not suitable for you. Ideally, the ELSS generates an optimal return over a longer investment tenure. Therefore, investors with a short investment horizon should avoid it.
3. What are the disadvantages of the NPS scheme?
Investments in an NPS also come with a few disadvantages. They include a longer lock-in period, limiting liquidity, and restricted partial withdrawal options. The requirement for compulsory annuity purchase limits your overall amount for withdrawal upon maturity.
4. What are the disadvantages of ELSS?
The key disadvantage of an ELSS is its market risk. ELSS focuses mostly on equities as an underlying asset, which increases the risk of return. Therefore, it is not suitable for investors with a low risk tolerance.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
