How to choose between ELSS and NPS for tax exemptions? 3 financial planners explain

The National Pension Scheme (NPS) is a better bet than equity-linked savings schemes (ELSS) to save taxes in 2023, revealed a survey of the available tax-saving options by The Economic Times.

The team compared the benefits of both the tax saving options based on myriad parameters including returns, safety, flexibility, liquidity, costs, transparency, ease of investment and taxability of income.

While both investment options come with their own sets of benefits, a lot depends on one’s financial goals and how some view their finances in the long run. We asked three financial planners to share their views on NPS versus ELSS. 

Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners, shares, “Investment decisions even if it is for tax savings should align with one’s overall investment goals. Hence, one needs to look at whether ELSS is a good bet or NPS is without getting too worried about just short-term returns. Also, ELSS is purely an equity-based asset, with a minimum lock-in period for the investment of three years. However, NPS is a product where the components can be equity, debt, and even alternates to some extent. Also, NPS is a longer-tenure investment. Hence NPS should be chosen by those who want more flexibility with their underlying investment and have much longer investment tenure.”

Viral Bhatt, Founder, Money Mantra, says, “ELSS funds are helpful for both immediate and long-term objectives. They also provide greater returns than NPS. They also pose a greater risk than NPS, though. In contrast to NPS, ELSS funds have a shorter lock-in period of three years, and investments are eligible for tax deductions under section 80C. For an NPS account, opening a Tier I account that restricts withdrawals is mandatory. Also, subscribers cannot redeem their entire investment before completing at least 10 years or attaining 60 years of age. However, partial withdrawals are allowed on fulfilling the conditions subject to an upper limit of 25 percent. Hence, there is no flexibility in the investment.”

Rajani Tandale, Product Head – Mutual Fund, 1finance.co.in, says, “NPS is a great asset class if you can hold till maturity. It is a low-cost product compared to mutual funds ELSS schemes, and its biggest advantage is the long-term lock-in feature.  Under mutual funds, investors tend to over analyse and keep switching their schemes very often based on their past performance."

Effective tax management is a skill that requires considerable expertise and experience. How you should choose between ELSS and NPS is determined by your financial goals, investment tenure, and how you see your money working.