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When planning for long-term financial goals like retirement, both the National Pension System (NPS) and Mutual Fund Systematic Investment Plans (SIPs) emerge as powerful tools. However, they are designed with different objectives and features. NPS is a government-backed retirement scheme that combines fixed-income and equity exposure with restrictions on liquidity. Mutual Fund SIPs, on the other hand, offer flexible, market-linked investments across equity, debt, or hybrid funds with no lock-in periods (except for ELSS).
Returns and market exposure
Mutual Fund SIPs typically have higher return potential due to their flexibility in equity allocation. Investors can choose aggressive equity funds for higher returns or conservative debt funds for stability. SIPs can deliver returns in the range of 10–15% annually, depending on the fund type and market conditions.
NPS, while market-linked, imposes caps on equity exposure (maximum 75% for Tier I accounts), which slightly moderates return expectations. Historically, NPS returns have ranged between 8–10%, but they come with lower volatility and greater stability.
Tax benefits and retirement focus
NPS scores high on tax benefits. Contributions are eligible for deduction under Section 80CCD(1) (within the ₹1.5 lakh 80C limit) and an additional ₹50,000 under Section 80CCD(1B). At maturity, 60% of the corpus is tax-free, while 40% must be used to purchase an annuity (which is taxable).
Mutual Fund SIPs, unless in ELSS funds, don’t offer tax deductions on investments. However, long-term capital gains (LTCG) tax on equity mutual funds is 10% beyond ₹1 lakh annually, and 20% with indexation on debt funds.
Liquidity and flexibility
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Mutual Fund SIPs offer complete liquidity and flexibility. You can pause, increase, reduce, or withdraw your SIP investments anytime (except for lock-in funds like ELSS). This makes them ideal for goal-based planning.
NPS is more rigid. Partial withdrawals are allowed only after three years and under specific circumstances. Full withdrawal is only permitted at retirement, with 60% taken as a lump sum and 40% going into an annuity.
Which is better for you?
Choose NPS if your primary goal is retirement planning and you want assured discipline, moderate returns with tax savings, and are comfortable with long-term lock-in. It’s particularly suited for salaried individuals looking to build a secure retirement corpus.
Choose Mutual Fund SIPs if you want flexibility, goal-based wealth creation, and higher return potential with market risk. They are suitable for all types of investors, especially those comfortable managing their investments and revisiting their portfolio periodically.
There is no single winner—NPS and Mutual Fund SIPs serve different purposes. Ideally, a diversified approach combining both can help you balance safety, tax-efficiency, and growth. Use NPS to anchor your retirement and SIPs for flexibility and wealth building across multiple life goals.