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NPS vs SIP : Which is a Better Investment Plan?

Updated on: Jan 21st, 2023 - 6:20:42 PM

6 min read

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Are you worried about your retirement? Don’t know where to park your hard-earned money for a stress-free retirement life? Do not worry. This article discusses everything you need to know about the most preferred investment options for retirement and the benefits it offers.

Calculate monthly Pension & Tax Benefits through Cleartax NPS Calculator


Systematic Investment Plan (SIP)

SIP in mutual funds in one of the most preferred investment options among millennials today. Through a SIP, you will be able to invest a fixed amount in mutual funds regularly. The amount mandated for financing will be debited from your account every month and utilised to buy units of the mutual fund you opt to invest in.

Advantages of SIP

  • Power of Compounding: Mutual fund investments spread over a long period are subject to compounding. The reinvested earnings grow at the same rate as that of the returns while compounding. In short, compounding allows you to build wealth at a faster pace through long-term investments when compared to one-time investments.
  • Instils Investor Discipline: When it comes to managing your finances, investing in mutual funds through SIPs will ensure a sense of financial discipline in your life. All you have to do is automate your payments towards your mutual funds. The allocated sum will be auto-debited from your saving fund and invested in your preferred mutual fund.
  • Offers Higher Returns: When compared to traditional investment options, mutual funds have always lead the race by generating high inflation-beating returns.
  • Ease of Investing: Most prospective investors are still uncertain of the amount they will have to allocate towards mutual fund investments. Do not worry. SIP addresses the issue by allowing you to start investing amounts as low as Rs 500. Not only will you be able to bring down the burden on your finances but also plan your budget accordingly.
  • Rupee Cost Averaging: Since the equity market is a volatile one, you will be able to purchase more shares when the market is down and vice versa. Rupee cost averaging helps you in bringing down the cost per unit of the mutual fund.
  • Emergency Fund for Rainy Days: Mutual funds through SIP also serves as an emergency fund in times of financial crises such as a critical illness or unemployment.

National Pension Scheme (NPS)

The Central Government introduced the National Pension Scheme as a social security initiative for individuals employed in the private, public, and unorganised sectors. Under this scheme, you will be required to allocate a certain amount from your income towards a pension account during the employment period regularly. At the time of maturity or retirement, you will be eligible to withdraw a certain percentage of the total corpus. The remaining portion of the corpus will get credited to your account in the form of pension monthly.

Benefits of NPS

  • Voluntary Contribution: An NPS subscriber has the flexibility to decide the time of contribution during an assessment year towards the programme. In the same line, he/she can also choose to increase/decrease the sum he wishes to invest on an annual basis.
  • Contained Risk: The NPS programme’s exposure towards equities is limited to 50%. The exposure towards equities depends on various factors such as the subscriber profile, type of NPS account, etc. This ensures that the volatile equity market does not impact the corpus generated at the time of maturity.
  • Offers Flexibility: NPS allows customers to choose from a wide array of investment options that would build their pension fund. This will give you an upper hand in deciding the funds you wish to invest in and accumulate wealth at the same time.
  • Transparency: The NPS programme is governed by the Pension Fund Regulatory and Development Authority (PFRDA). The NPS Trust ensures that your investments are in line with the regulatory norms, and the fund managers are monitored and review accordingly.

Lock-in Period

NPS will allow you to withdraw the corpus only after attaining 60 years of age or at the time of retirement.

Tax Benefits

Both NPS and SIP investments are eligible for tax deductions under Section 80C of the IT Act, 1961.

NPS: An NPS subscriber will be eligible for tax benefits up to Rs 1.50 lakh of the gross income under Section 80CCE of the IT Act. Additionally, you can also avail tax benefits up to Rs 50,000 on their investment towards NPS (Tier I account) under subsection 80CCD (1B) of the Income Tax Act, 1961.

SIP on Mutual Funds: To avail tax benefits for SIP in mutual funds, you will be required to invest in ELSS, i.e. equity-linked savings scheme. Under Section 80C of the IT Act, taxpayers are eligible for deductions up to Rs 1.50 lakh on investments made towards ELSS in a financial year. It is advised to consider your financial goals before deciding the type of investment you would like to make.

NPS can be the best bet for individuals who wish to plan a stress-free retirement life. SIPs though, are more suitable if you are looking for flexibility and liquidity. Click here if you want to know more about investing in real estate investments as compared to mutual funds.

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