NPS or ELSS: Which Deduction Actually Suits You

Both reduce your taxable income. That is where the similarity ends, and the deduction is the least interesting thing about either of them.

What separates them is when you can have your money back, and what happens to it when you do.

The deductions, with current section numbers

Under the Income-tax Act, 2025, which took effect on 1 April 2026 and governs tax year 2026-27 onwards, the relevant provisions sit in Chapter VIII.

• Section 123 covers life insurance premia, provident fund contributions, certain pension funds and notified pension schemes. This is the provision most readers will recognise by its earlier number, 80C, and an ELSS investment qualifies here.
• Section 124(3) covers an amount paid or deposited to a notified pension scheme by the individual. This is the provision previously known as 80CCD(1B), the additional NPS deduction that sits over and above the section 123 limit.
• Section 124(1)(a) covers the employer’s contribution to a pension scheme, previously 80CCD(2).

The old numbers appear once each above because that is what you will find on every older article and every conversation with a colleague. From here the current numbers are used.

⚠ These deductions are features of the regime that permits them. If you are on the concessional rate regime, most of them are not available to you at all, which makes the whole comparison moot. Establish which regime you are on before anything else.

Lock-in is the real difference

Three years against thirty is not a difference of degree. If you are 28, an NPS contribution is money you will next see in 2058.

The annuity requirement at exit is the condition people notice last and mind most. A defined portion of the corpus must be used to purchase an annuity, and the income that annuity pays is taxable in the year you receive it. You are not handed a lump sum to do as you wish with.

Exit taxation, described rather than cited

For tax year 2026-27, ELSS gains are taxed under section 198 of the Income-tax Act, 2025, and up to 60% of the amount an NPS subscriber receives on closure is exempt under Schedule II (Sl. No. 6). The details are below; check the current rules before you act on them.

ELSS at exit. Redemption after three years is a long-term capital gain on an equity-oriented fund. Under section 198 of the Income-tax Act, 2025, the first ₹1,25,000 of such gains in a tax year is not taxed, and gains above it are taxed at 12.5%. You receive the whole redemption, less tax.

NPS at exit. The corpus splits. A portion may be withdrawn as a lump sum. Since the PFRDA amendment of December 2025 a non-government subscriber may take up to 80% as a lump sum, but only the part up to 60% of the amount payable is exempt under Schedule II (Table: Sl. No. 6) of the Income-tax Act, 2025. The remainder buys an annuity, and the annuity income is taxable as it is received, at your slab rate in each of those years. The deduction you took at 35 is, in part, tax deferred rather than tax saved.

That last sentence is the one worth sitting with. ELSS taxes the gain once and lets you go. NPS defers the tax on a portion of it into a stream you will receive for the rest of your life.

A worked comparison of the deduction itself

An individual at a 30% marginal rate, on a regime where both deductions are available.

Assumes a 30% marginal rate before surcharge and cess, the full section 123 limit otherwise unused, and that you are on a regime permitting both. Limits and availability should be confirmed for the current tax year.

Note the row that matters: they are not alternatives. The section 124(3) deduction sits above the section 123 limit, so using both is additive. Framing this as a choice is usually the wrong framing.

How to actually decide

If your section 123 limit is already full from provident fund, life insurance premium and home loan principal, which it often is for a salaried person, then ELSS adds no deduction at all. NPS under section 124(3) is then the only route that adds anything, and the question answers itself.

If you may need the money before 60, ELSS. Three years is a real constraint but a survivable one. NPS is not money you can plan around.

If you want control over the equity share, NPS gives you it and ELSS does not. If you would rather not think about allocation, the reverse.

If your employer contributes to NPS under section 124(1)(a), take it. That is a deduction on money that is not coming out of your take-home pay, and nothing else here competes with it.

The common sensible answer for a salaried person in their thirties is both: fill what the section 123 limit still has room for, add the section 124(3) contribution, and accept the lock-in on the smaller of the two amounts.

Where this fits

• The side-by-side tool, to project both on your own amount, period and return: ELSS vs NPS
• Project the ELSS side: ELSS calculator
• The scheme in full: NPS complete guide
• What inflation does to a 30-year corpus: real return after inflation

Sources

Section numbers are those of the Income-tax Act, 2025, as identified in the notified Income-tax Rules, 2026, Gazette of India, Extraordinary, Part II section 3(i), 20 March 2026. Exit taxation refers to section 198 and Schedule II (Sl. No. 6) of that Act; NPS withdrawal limits follow the PFRDA exits and withdrawals amendment regulations of December 2025.