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Comparing NPS, PPF, ELSS & FDs: Which Is the Best Tax-Saving Investment Option?

By admin
13 August 2025
4 mins read

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Comparing NPS, PPF, ELSS & FDs: Which Is the Best Tax-Saving Investment Option?

Looking for the best tax-saving option for your portfolio while planning for retirement? With various investment options available, it can become challenging to decide which one best suits your needs. The National Pension Scheme (NPS), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and Tax Saver Fixed Deposits (FDs) are among the top options.

While each investment instrument offers unique tax benefits, NPS stands out as the perfect choice for tax savings, long-term wealth creation, and retirement security. Let's see how.

Overview of each investment option

NPS, PPF, ELSS, and Tax saver FDs are some popular tax-saving investment options in India. Each of these investments offers unique benefits and serves different financial goals.

National Pension Scheme (NPS)

The NPS is a government-sponsored retirement savings scheme that lets investors invest in a mix of equities, corporate bonds, and government securities. Since NPS is linked to the stock market, it has the potential to generate higher returns, typically around 13%, over the long term compared to traditional fixed-income investments.

Moreover, under the new tax regime, NPS provides triple tax exemptions on contributions, interest earned, and the maturity amount. It also offers the flexibility to choose your asset mix among equity, debt, and alternative investments, depending on your risk appetite and financial goals. Since NPS investments are handled by experienced pension fund managers, they ensure efficient management for long-term growth.

Additional Read: Difference Between Tier 1 and Tier 2 NPS

Public Provident Fund (PPF)

PPF is another government-backed long-term savings scheme, offering a fixed rate of return of around 7.10%. While PPF is a safe and reliable investment option, its returns might not be enough to keep up with the rising inflation over the long term.

Equity Linked Saving Scheme (ELSS)

ELSS funds are mutual funds that primarily invest in equities and have a three-year lock-in period shorter than NPS and PPF. Since ELSS has a higher equity exposure, it also has the potential to generate high returns of around 15.47% (category benchmark). However, it also comes with higher volatility, which increases the investment risk.

Tax Saver Fixed Deposits (FDs)

Tax-saver FDs are fixed deposits that offer tax benefits and have a lock-in period of five years. They offer guaranteed returns of 6.50% and relatively lower risk as they are not affected by market volatility. However, the returns on tax-saver FDs are typically lower than those of market-linked investments like NPS and ELSS.

Comparing NPS, PPF, ELSS & FDs: Detailed Table

Here’s a table highlighting the NPS vs. PPF vs. ELSS vs. FD differences.

Feature	National Pension Scheme (NPS)	Public Provident Fund (PPF)	Equity-Linked Saving Scheme (ELSS)	Tax-Saver Fixed Deposits (FDs)
Type of investment	Market-linked retirement scheme	Government-backed savings scheme	Market-linked mutual fund (equity)	Fixed return bank deposit
Returns	8% to 12% annually (depends on the asset allocation and performance)	7.10% per annum (fixed; set by the government)	Can range from 1% to 30% per annum	Ranges from 6.25% to 7.10% (varies from bank to bank)
Risk level	Moderate (debt + equity exposure)	Very low (government-backed)	High (100% equity exposure)	Very low (guaranteed returns)
Lock-in period	Locked until retirement (60 years); Partial withdrawal possible under specific circumstances after an initial 3-year period	15 years (can be extended)	3 years	5 years for tax-saver fixed deposit
Tax benefits (old regime)	Up to Rs. 1.5 lakhs under Section 80C + Rs. 50,000 under Section 80CCD(1B)	Up to Rs. 1.5 lakhs under Section 80C	Up to Rs. 1.5 lakhs under Section 80C	Up to Rs. 1.5 lakhs under Section 80C (only for a five-year FD)
Tax benefits (new regime)	Up to 10% of the basic salary under Corporate NPS under Section 80CCD(2)	NIL	NIL	NIL
Tax on returns	Partially taxable	Tax-free	Long-term Capital Gains (LTCG) at 12.5% over returns exceeding Rs. 1.25 lakhs	Taxable at slab rates applicable to your total income
Minimum annual investment	Rs. 1,000	Rs. 500	As per the selected mutual fund scheme	Rs. 100
Investment method	Online/Offline via NPS portal	Banks/Post Offices	Mutual fund platforms	Banks/NBFCs
Withdrawal	Upon retirement, 40% to purchase an annuity + 60% as a lump sum	Full after maturity (15 years)	Full after lock-in period (3 years)	Full upon maturity
Liquidity	Low	Low	Moderate	Moderate
Ideal for	Retirement planning	Long-term savings	Growing wealth + tax saving	Capital protection with steady returns

Conclusion

A comparison of EPF vs. PPF vs. NPS vs. ELSS highlights that the best investment instrument for tax savings and retirement planning is NPS. NPS offers market-linked retirement savings with higher return potential, whereas PPF is a government-backed, fixed-return scheme ideal for conservative long-term savers. This difference between NPS and PPF emphasizes that NPS is better suited for a higher retirement corpus, while PPF is ideal for assured safety.

Secure your future and lower your tax liability—invest in NPS today!

FAQs

Which gives better returns: NPS or ELSS?

ELSS gives higher returns of around 15.47% (category benchmark), while NPS offers about 13%. However, ELSS can be more volatile as it invests mainly in equities, whereas NPS is relatively stable with a diversified mix of assets.

Can I withdraw my ELSS investment before three years?

No, you cannot withdraw your ELSS investment before the lock-in period of three years has been completed. However, if you are investing through a Systematic Investment Plan (SIP), you can cancel or pause future fund transfers at any time without penalty.

Is NPS completely tax-free on maturity?

No, NPS is not completely tax-free on maturity, as taxation depends on the NPS Tier you hold. In Tier 1, up to 60% can be withdrawn tax-free, while 40% must be used to buy an annuity, whose payouts are taxed as income. Tier 2 withdrawals are fully taxable as per your applicable slab.

What is the extra tax benefit of NPS over ELSS?

While both NPS and ELSS provide a tax benefit of up to ₹1.5 lakh under Section 80C of the Income Tax Act, NPS offers an additional deduction of ₹50,000 under Section 80CCD(1B). Do note that these benefits are available only under the old tax regime.

Who should choose ELSS over NPS?

ELSS is ideal for medium-term goals due to its three-year lock-in. It suits young investors with a higher risk appetite seeking better returns. On the other hand, NPS is better for those who prefer a more stable investment and are focused on long-term retirement planning.