NPS vs SIP : Which is a Better Investment Plan?

04 August 2023
8 min read
NPS vs SIP : Which is a Better Investment Plan?

Retirement planning is a vital aspect of every individual’s life. It involves a careful accumulation of funds that will provide you with the necessary financial resources you would require to meet their post-retirement expenses.

The most important aspect of planning for your retirement is to start early and invest in avenues that offer inflation-beating returns. 

When it comes to retirement there are two popular routes that individuals look for; the National Pension Scheme and mutual fund SIP. In this blog, I will compare both plans on various parameters so that you can select the one most suitable for you. Read on! 

National Pension Scheme

NPS or National Pension Scheme was introduced by the government in 2004. Initially, it was an exclusive scheme available only to government employees. 

However, in 2009, NPS in India was made available to employees beyond the public sector. It allows you to invest in the scheme throughout your employment. You can withdraw up to 40% of the accumulated corpus upon retirement. 

A portion of the remaining 60% needs to be reinvested in an annuity and while the other can be credited monthly.  

Features Of NPS

  • Investment Flexibility

One of the benefits of the National Pension Scheme is you can decide to invest whenever you choose to according to your convenience. There exists no clause which states that individuals need to invest regularly in the scheme.

  • Low-risk

NPS investment has low equity exposure. The maximum percentage which can be invested towards equity shares or stocks is 75%. Therefore, it will have a less volatile response to market fluctuations. However, this factor also limits the scheme’s profit-yielding capacity and appreciates capital only so much. 

  • Investment Options

Primarily, NPS in India offers two kinds of investment options to its prospective investors – active choice investment and auto choice investment. In the former option, you can decide to invest in your choice of securities. It offers the liberty to choose according to your risk appetite and wealth appreciation objectives.

In the latter option, the scheme manager chooses the securities to invest in on your behalf based on the age slab of the investor. Then, the risk factor of your portfolio would be inversely proportional to your age.

  • Returns

As NPS in India has limited exposure to equity shares or stocks their earning potential is limited. In most cases, NPS funds generate annual returns in the range of 8%-10%. However, compared to other fixed-income securities, it offers higher yields. You can calculate your NPS returns using Groww ‘s NPS Calculator Online.

  • Equity Portion

As mentioned earlier, only 75% of NPS investments can be directed toward purchasing equity funds. This proportion is further reduced by 2.5% annually when you reach the age of 50 years.

  • Early Withdrawal

Before the maturity of the scheme or your retirement, there are strict rules imposed on withdrawal. You can only withdraw 25% of your corpus depending on the purpose of your withdrawal, such as expenses occurring from medical treatments of self or family members, a child’s education or marriage, buying or building a house, etc.

The limit to such withdrawals is 3 times during the scheme tenure with a minimum gap of 5 years between each withdrawal.

Systematic Investment Plan

SIP or Systematic Investment Plan, on the other hand, is a way to invest in mutual funds that allows you to invest periodically in a specific fund and enjoy dividends on your investments regularly.

Mutual Funds are investment pools which accumulate funds from various individuals and are used to purchase securities. These securities can be either market-linked or fixed-income securities. Examples of market-linked securities are equity shares and stocks; debentures, bonds, and bills are examples of fixed-income securities.

Between NPS and SIP returns, long-term gains from the latter tend to be higher. If you start investing early in a diversified equity portfolio via the SIP route, you would be able to amass a comfortable corpus due to the power of compounding that SIP leverages. The SIP route also frees you from the bothers of market timing.

You can also choose to invest in fixed income funds, i.e. debt funds which offer considerable returns and involves lower risk compared to equity funds.

Features of Systematic Investment Plan

  • Periodical Investments

In the case of SIP, you need to invest a fixed sum of money periodically in your chosen fund. It helps you become more disciplined as an investor and makes your expenditure pattern more consistent.

You can initiate your investments with an amount as low as Rs. 500. Therefore, it does not put much of a financial burden on you and helps you build your post-retirement corpus conveniently.

  • Compounding

In the case of SIP, the interest on the same is compounded quarterly. The compounding component increases your corpus exponentially.

Example: Mr A decides to invest Rs. 500 monthly through SIP in a 14% ELSS fund at the age of 40. He plans to retire at the age of 60 years. Therefore, he avails 20 years for his investment. At the end of 20 years, his total investment amount would stand at Rs. 1.2 Lakh and his returns from the same would be nearly Rs. 6.5 Lakh. In a period of 20 years, his investments appreciated by almost six times.

  • Rupee Cost Averaging

In SIP, you can benefit from rupee cost averaging. This feature allows you to purchase more units of a fund you are investing in during a market slump and sell the same when the market is at its peak. It significantly reduces the cost per unit of funds and allows you to realise a higher profit margin.

  • Higher Returns

If you compare NPS and SIP Mutual Funds, the latter offer much higher returns. NPS has limited exposure to equity shares and stocks, whereas Mutual Funds can be employed to purchase a higher proportion of equities. Equity funds have a track record of providing returns in the range of 14%-18% in the long run. However, it responds to market volatility with more or less similar intensity and is therefore subject to higher risks as well.

  • Multiple Options

Mutual Funds offer a wide assortment of investment options. Depending on your risk appetite and time horizon, you can either decide to invest in equity funds, ELSS, debt funds, hybrid funds, fund of funds, etc.

Equity funds and ELSS are used to purchase equity shares and stocks; debt funds are used to purchase fixed income instruments; hybrid funds are used to purchase a mix of equity and fixed income instruments; fund of funds are used to invest in other Mutual Funds.

Hybrid funds are ideal if you are looking to diversify your investment portfolio along with substantial wealth appreciation for your retirement.

  • Easy Investment Process

The investment process in SIP is convenient.

You can link your bank account through which you decide to make the investment with your aggregator and agree to automate payments. The investments would be automatically debited from your account at the due date.

  • Withdrawal

Mutual fund investments, except for ELSS funds can be withdrawn at any point during the investment tenure. You can also start a systematic withdrawal plan after a sufficient retirement corpus has been accumulated, which will serve as a source of monthly income for you. 

Tax Implications on NPS and SIP

In the case of SIP Mutual Funds, the dividends realized from it are exempt from tax. On the other hand, capital gains on the same are taxed as per the duration of the investment. Capital gains are classified into two categories – long-term capital gains and short-term capital gains. Depending on the kind of Mutual Fund, the duration is determined.

If it is an equity fund or an equity-oriented capital fund, gains from it will be classified as long-term capital gains if the investment tenure exceeds 1 year. 

Similarly, if it is a debt fund, debt-oriented hybrid fund, or ELSS fund, then it will be classified as long-term capital gain if the period exceeds 3 years. The following table demonstrates the tax implications of capital gains.

Particulars Long-term capital gain tax Short-term capital gain tax
Equity Funds  10% on the amount exceeding Rs. 1 Lakh 15%
Debt Funds 20%  Taxed as per the applicable slab rate
ELSS funds 10% on the amount exceeding Rs. 1 Lakh 15%
Equity-oriented hybrid funds As per equity fund taxation As per equity fund taxation
Debt-oriented balanced funds As per debt fund taxation As per debt fund taxation

NPS, on the other hand, is tax-free to the extent of 60% of the corpus amount. The rest 40%, which is to be reinvested in an annuity, is taxable as per the applicable tax slab of the individual. 

Both NPS and SIP for ELSS receive tax benefits u/s 80C.

Gross income from NPS is exempted from tax up to Rs. 1.5 Lakh u/s 80CCE. You can also receive a tax exemption of up to Rs. 50,000 on the NPS investment amount u/s 80CCD.

Similarly, u/s 80C investment amount in ELSS funds is exempted to the extent of Rs. 1.5 Lakh in a year.


The bottom line to choosing the right investment option depends on how fast you want to retire, how long your investment horizon is, the amount of corpus you want to accumulate and ultimately your risk profile. If flexibility and liquidity are important aspects for you then the SIP route to investing in mutual funds certainly scores over NPS.

If you invest in equities via the SIP route, you can even retire early and start receiving a monthly amount by means of a systematic withdrawal plan, which is not in the case of NPS. So weigh the pros and cons of both options and select the one that is most aligned with your needs.

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.


The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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