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SIP Vs NPS: Which is Better Investment Plan

11 Mins 01 Jul 2025 0 COMMENT
SIP Vs NPS


Choosing between SIP and NPS can be confusing for new investors. Both are popular tools for long-term wealth creation, but they serve different goals. In this article on NPS vs SIP, we’ll compare their returns, flexibility, and tax benefits to help you decide what suits you best. If you’re wondering, is NPS better than SIP or vice versa, this simple guide will help you understand the pros and cons of both options before making a decision.

What is NPS or National Pension Schema & its Benefits?

The National Pension System (NPS) is a government-backed retirement savings scheme designed to help individuals build a secure financial future. It is open to all Indian citizens aged between 18 and 70 years. When you invest in NPS, your money is allocated into different asset classes such as equity, government bonds, and corporate debt based on your risk preference. The goal is to build a retirement corpus over time. You can contribute regularly—monthly, quarterly, or annually—and the funds are managed by professional fund managers.

NPS is especially useful for people who want to create a retirement fund in a disciplined and tax-efficient way. On maturity, 60% of the total corpus can be withdrawn tax-free, while the remaining 40% must be used to buy an annuity, which gives you a regular monthly income after retirement.

Benefits of NPS:

  • Tax Benefits: You get tax deductions up to ₹2 lakh under Sections 80C and 80CCD(1B).
  • Low Cost: NPS has one of the lowest fund management charges among investment options.
  • Flexibility: You can choose your own asset mix and fund manager.
  • Compounding Returns: Long-term investing leads to good growth through compounding.
  • Safe and Regulated: NPS is regulated by PFRDA (Pension Fund Regulatory and Development Authority), ensuring safety and transparency.
  • Retirement Security: Offers a reliable source of income after retirement through annuity.

What is SIP & its Benefits?

A Systematic Investment Plan (SIP) is a simple and disciplined way to invest in mutual funds. Instead of investing a large amount all at once, SIP allows you to invest a small fixed amount regularly—weekly, monthly, or quarterly. It is ideal for people who want to grow their wealth slowly and steadily without worrying about market timing.

SIPs are flexible, easy to start, and suitable for both beginners and experienced investors. You can start a SIP with as little as ₹500 per month and increase it as your income grows.

Benefits of SIP:

  • Disciplined Saving: Encourages regular saving habits, helping you plan for future goals.
  • Affordable Entry: You can start investing with a small amount, making it accessible to everyone.
  • Rupee Cost Averaging: Helps reduce the impact of market volatility by averaging the purchase cost of units.
  • Compounding Growth: The longer you stay invested, the more your money grows.
  • Flexible Investment: You can increase, pause, or stop your SIP anytime.
  • No Market Timing Needed: You invest regularly, so you don’t have to worry about market highs and lows.
  • Professional Management: Your money is managed by expert fund managers.

Difference Between NPS and SIP

Both NPS (National Pension System) and SIP (Systematic Investment Plan) are popular investment tools, but they serve different purposes. Understanding their distinct features helps in making informed financial decisions.

Feature

National Pension System (NPS)

Systematic Investment Plan (SIP)

Purpose

Primarily for retirement planning, government-backed pension.

Method to invest in mutual funds for various financial goals (e.g., house, education, retirement).

Flexibility

Limited withdrawal before retirement (age 60), strict rules.

High flexibility; can start, stop, pause, or change amounts anytime (except for ELSS lock-in).

Investment

Mix of equity, corporate bonds, government securities. Equity exposure capped (e.g., 75%).

Wide range of mutual fund schemes (equity, debt, hybrid, etc.). No cap on equity exposure.

Tax Benefits

Contributions under 80C and additional ₹50,000 under 80CCD(1B). 60% of corpus tax-free on withdrawal; 40% for annuity (taxable).

Only ELSS SIPs get 80C benefits. Long-term capital gains on equity funds above ₹1 lakh are taxed at 10%.

Liquidity

Low; primarily a long-term retirement product with withdrawal restrictions.

High; generally, allows partial/full withdrawals as needed (except for ELSS 3-year lock-in).

Returns

Generally stable, moderate market-linked returns (8-10% historical).

Potential for higher market-linked returns, especially from equity funds (12-15%+ historical).

Regulation

Regulated by PFRDA (Pension Fund Regulatory and Development Authority).

Regulated by SEBI (Securities and Exchange Board of India).

 

Tax Implications on SIP and NPS

When choosing between SIP and NPS, it’s important to understand how each is taxed. This can help you decide what’s best for your financial goals.

NPS (National Pension System) offers attractive tax benefits. You can claim a deduction of up to ₹1.5 lakh under Section 80C and an additional ₹50,000 under Section 80CCD(1B), making a total of ₹2 lakh in tax savings per year. On retirement, you can withdraw 60% of the corpus tax-free, while the remaining 40% must be used to buy an annuity, which is taxable as per your income slab. Despite the partial taxation at maturity, NPS remains a strong choice for retirement planning due to its long-term benefits and higher tax deductions.

Read More: Tax Benefits of NPS

SIP (Systematic Investment Plan) in mutual funds has a different tax structure. Equity mutual fund SIPs held for more than 1 year attract 10% tax on gains above ₹1 lakh (LTCG). Debt fund SIPs attract tax based on your holding period and income slab. There are no extra tax deductions for SIP investments except for ELSS (Equity Linked Savings Scheme) funds, which qualify for deduction under Section 80C up to ₹1.5 lakh.

What to Choose Between SIP and NPS:

  • NPS should be chosen if you looking to invest for building your retirement corpus, tax saving, long-term lock in period options for disciplined investing and moderate returns.
  • Investing in SIP should be chosen if you are looking for flexibility in building your corpus. SIPs are more goal-based investments with varied return exposure based on the chosen fund.

Conclusion

When comparing NPS vs SIP, both serve valuable but different purposes. NPS is ideal for long-term retirement planning with strong tax benefits and disciplined saving. SIP, on the other hand, offers greater flexibility, liquidity, and potentially higher returns, making it suitable for a range of financial goals.

So, is NPS better than SIP? The answer depends on your needs—choose NPS for retirement security and SIP for wealth creation. A balanced mix of both can provide a stable and rewarding financial future.

FAQs

Is it better to invest in SIP or NPS?

For retirement planning, NPS offers tax benefits and a structured approach, but with limited liquidity. SIPs provide more flexibility for various goals and potentially higher market-linked returns, though they are more volatile. The "better" choice depends on your specific financial goals, risk tolerance, and liquidity needs.

What is the investment duration for SIP and NPS investments?

For NPS, funds are generally locked until age 60, with limited partial withdrawals after 3 years. SIPs are flexible; however, ELSS funds (invested via SIP) have a 3-year lock-in for each installment.

What is the equity exposure of SIP and NPS investments?

NPS equity exposure is capped (e.g., max 75% for Tier I, reducing with age). SIP, as an investment method in mutual funds, offers varied equity exposure from 0% (debt funds) to 100% (pure equity funds), depending on the chosen scheme.

Are there any lock-in periods in SIP and NPS?

NPS has a lock-in until age 60, with limited partial withdrawals after 3 years. Most SIPs don't have a lock-in, except for ELSS (tax-saving) mutual funds, which have a 3-year lock-in per installment.