Tax Saving Mutual Funds vs NPS: Which One Gives Better Post-Tax Returns?
By Khushi Rawat 26-08-2026 10
Tax saving mutual funds & NPS can help you save tax and build wealth. But they serve different purposes. Tax saving mutual funds or Equity Linked Savings Schemes (ELSS) invest mainly in shares. NPS is a pension scheme that can invest in equity, debt and government bonds.
Begin with the Tax Regime
Tax exemption on personal ELSS and NPS payments is largely associated with the old tax regime. The limit for ELSS for FY 2025-26 is up to ₹1.5 lakh under section 80C. This common ceiling can be claimed for an NPS Tier I contribution under Section 80CCD(1). It can also be claimed for a separate deduction up to ₹50,000 under Section 80CCD(1B).
From the assessment year 2026-27, new section numbers will be used in the Income-tax Act, 2025. Sections 123 and 124 deal with general relief. Under the new tax regime, no individual can opt for the personal ELSS deduction as well as the ₹50,000 NPS deduction. Relief can still be claimed for an eligible employer contribution to NPS.
How do tax-saving mutual funds work?
ELSS funds are required to invest a minimum of 80% of their assets in equity and related units. Each payment is locked in for 3 years. Every SIP installment has a new lock-in created every month.
After 3 years units can be sold or retained as per the objective. This means ELSS has a role to play in pre-retirement plans. Its worth can rise and fall with the stock market.
Gains from ELSS are taxed like gains from an Equity fund on sale. Long-term gains above the annual limit of ₹1.25 lakh are taxed at 12.5%. The cap is on total eligible equity gains for the tax year, not per fund.
For example, an ELSS amount of ₹1 lakh becomes ₹2 lakh. Profit is Rs. 1 Lakh. If there are no other gains under the same rule, this remains within the annual limit. There would be no long term capital gains tax .
Calculating NPS
NPS Tier I is designed for retirement. Returns vary based on the mix of equity, company debt and government bonds. Strict withdrawal rules exist on this account, but partial withdrawals may be allowed for specific needs.
The non-government NPS sector has amended rules to permit a lump sum of 80% of the corpus at the time of normal exit, with a minimum of 20% to be used for annuity. However, the tax exemption on a lump sum payment is limited to 60% of the corpus. Any cash withdrawal in excess of that amount is not covered by this exemption. The government-sector exit rules still have a cap of 60% on the lump sum and a minimum of 40% for an annuity.
The amount used to buy an annuity is not taxed at that point. Any pension paid over and above is treated as income and taxed as per the slab rate in the year it is received. Thus, the annuity rate and the future tax bracket will influence the post-tax value.
Post Tax Returns Comparison – Step by Step
First, begin with the tax regime. Add the tax saved under each deduction in the old regime. Under the new regime, personal payments may no longer reduce taxable income.
Second, compare the same quantity and time. Don’t compare the performance of a 3-year ELSS with a retirement corpus built over decades.
Third, use net profit. For ELSS, deduct expense ratio and tax on sale. For NPS include fund charges, tax free lump sum, any taxable cash portion, annuity amount and tax on pension.
Fourth, test risk and access. ELSS has equity risk and lack of access post lock-in period. NPS can follow a mixed asset plan but access is still subject to pension rules.
Fifth, verify the goal. ELSS can be suitable for a long term wealth objective. NPS may be suitable for a plan focused on pension income and saving discipline.
Where does Bajaj Broking fit in?
With the right tools, you can compare between the two fund types, past returns, expense data, scheme facts etc. This allows you to check everything at once and make a direct comparison.
This can help in shortlisting tax saving mutual funds after checking the tax regime, risk level and goal period. Past performance is no guarantee of future results.
Conclusion
No option leads to a fixed post tax result. ELSS offers you equity led growth, 3 years lock-in and tax on gains over annual limit. NPS offers a retirement fund, an extra deduction under the old regime, an exit-related tax structure and pension income that is taxable.
A calculation that provides a fair choice is: tax saved now, net growth, tax at exit and access to money. ELSS can be suited for flexible wealth goals whereas NPS can be suited for pension goals. Some investors may use both, for different needs.
Tags : Tax saving mutual funds
