What is NPS?
The National Pension System (NPS) is a government-backed, voluntary retirement savings scheme
designed to build a pension corpus over the long term. In 2004, it was introduced to government employees,
and in 2009, it was opened to everyone. It is regulated by the Pension Fund Regulatory and Development
Authority (PFRDA).
Here are some of the major aspects of the scheme:
- Full Form: National Pension System
- Who is Eligible to Invest: Indian citizens between 18 and 70 years of age, including salaried,
self-employed, and NRIs.
- Asset Classes: Equity, corporate bonds, government securities, and alternate investments.
- Tier I Account: Primary retirement account, which is mandatory to subscribe to the NPS scheme. Partial
withdrawals are allowed subject to terms and conditions.
- Tier II Account: A voluntary account that has no mandate on contributions and also allows easy
withdrawals.
- Tax Benefit: Tax benefit on self-contributions under Section 123 and Section 124(3) of the Income Tax
Act of 2025. The limit is ₹2 lakhs. Tax benefit is also allowed on employer's contribution under Section
124.
What is SIP in Mutual Funds?
A Systematic Investment Plan (SIP) is a method of investing a fixed amount of money in mutual
funds at a regular frequency. It is not an investment product but a regulated investment approach.
In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI),
and the Association of Mutual Funds in India (AMFI) is the industry association for mutual funds.
- How it Works: Investors contribute a fixed sum monthly, weekly, or quarterly into a chosen mutual fund
- Minimum Amount: Starts from ₹500 per month in most funds
- Investment Options: Equity, debt, hybrid, and a wide variety of funds
- Returns: Market-linked, based on fund performance
While SIP is a flexible investment method, investors looking for a dedicated
retirement-focused investment option may consider how NPS complements it with structured retirement
benefits.
NPS vs SIP: Key Differences at a Glance
NPS and mutual funds are two distinct types of investment avenues. While SIPs are primarily
linked to mutual fund investments, you can also use them to invest in the NPS scheme. That being said, the
table compares NPS vs SIP in mutual funds against various important parameters:
| Parameter |
NPS |
SIP |
| Investment type |
Government-backed pension scheme |
Investment method in mutual funds |
| Regulator |
PFRDA |
SEBI |
| Minimum investment |
Tier I - ₹500 per contribution, ₹500 to open the account and ₹1000 annually
Tier II - ₹250 to open the account and no minimum contribution limit
|
₹500 per month in most funds |
| Lock-in period |
Till age 60 (Tier I) |
No lock-in except ELSS (3 years) |
| Liquidity |
Partial withdrawal allowed after 3 years with conditions |
High liquidity. Withdraw anytime except for ELSS which has a lock-in of 3 years |
| Returns |
Market-linked, depends on the type of asset class and investment strategy selected |
Market-linked, depends on the type of mutual fund selected |
| Readymade investment strategies |
Available under Auto Choice which allows automated allocations |
Not available |
| Tax benefit |
- ₹1.5 lakh under Section 123 plus ₹50,000 under Section 124(3) on own contribution
- Tax benefit is also available on the employer's contribution under Section 124
|
Tax benefit available only on ELSS investments under Section 123 up to a limit of ₹1.5 lakhs
|
| Exit or maturity |
Up to 80% lump-sum withdrawal allowed; minimum 20% annuity purchase required for eligible
non-government subscribers |
Full or partial redemption is allowed anytime (for ELSS, the mandatory 3-year lock-in
applies) |
| Risk level |
Based on the fund selected |
Based on the fund selected |
| Best for |
Retirement planning |
Wealth creation and goal-based investing |
NPS vs SIP: Tax Benefits Compared
One of the major factors to consider when comparing NPS vs SIP is taxation. In this
aspect, NPS stands out as the clear winner. Check out how SIP vs NPS fare on tax treatment:
| Tax Section |
NPS |
SIP |
| Section 123 |
Up to ₹1.5 lakh |
Up to ₹1.5 lakh only if you choose ELSS. Other mutual funds do not give tax benefit on
investments |
| Section 124(3) |
Additional ₹50,000 deduction available |
Not applicable |
| Section 124 |
Additional tax benefit on employer's contribution |
Not applicable |
| Tax on maturity |
60% lump sum is tax-free. |
Equity-oriented funds:
- If held for less than 12 months: Gains taxed at 20%
- If held for 12 months or longer: Gains up to ₹1.25 lakhs are tax-free. Excess
returns attract 12.5% tax.
Debt-oriented funds:
Gains are taxed at your income tax slab rate
|
Note on New Tax Regime:
- Deductions under Sections 123 and 124(3) are not available
- Deduction is available under Section 124 for the employer's contribution
- Tax benefits apply only under the old tax regime, as per the current CBDT rules
NPS vs SIP: Returns and Risk Profile
The NPS vs SIP comparison also depends on returns and risk. Both are market-linked
investment options, but their performance depends on asset allocation and investment approach. NPS
invests across equity, corporate bonds, and government securities to create a balanced long-term
retirement portfolio. SIP returns depend on the type of mutual fund selected and market performance
over time.
| Parameter |
NPS (Tier I Equity) |
Equity SIP (Flexi-cap) |
| Historical 10-year average returns |
12% to 14% |
12% to 15% |
| Asset allocation |
Fixed range. Equity capped at 75% |
Fully flexible based on fund strategy |
| Fund manager choice |
Limited selection under PFRDA-approved managers |
Wide choice across AMCs regulated by SEBI |
| Risk category |
Moderate |
Moderate to high |
Key points:
- NPS offers more stability due to diversified allocation
- Equity SIPs can offer strong long-term growth depending on market performance.
- Debt and hybrid SIPs can lower risk but also reduce returns
Disclaimer:
These are not guaranteed returns, as they are dependent on the market, interest rate
cycles and fund managers' performance. Past performance is not an indicator of future performance.
Investors need to assess their risk profile, timeframe and goals before they decide whether to
invest in a project or not.
Can You Invest in Both NPS and SIP?
Instead of comparing NPS vs SIP, why not choose both?
The combination of NPS and SIP in mutual funds can help you achieve the balance
between retirement planning and wealth creation. While NPS can help you create a targeted retirement
fund with distinct tax benefits, SIPs in mutual funds can facilitate disciplined savings and
long-term wealth creation.
How they complement each other:
- NPS for retirement: Structured savings with additional tax deduction of ₹50,000 under Section
124(3)
- SIP for goals: Suitable for expenses like education, home purchase, or emergencies
- Diversification: Combines stable allocation in NPS with growth potential from equity SIPs
Practical tips:
- Investors should balance NPS allocations with liquidity needs because of its retirement-oriented
structure.
- Use SIP for medium- and long-term financial goals
- Review asset allocation annually based on income and risk profile
- Investors may combine NPS with other investment options to maintain liquidity for short-term
needs.
Conclusion
Both NPS and SIP in mutual funds serve different purposes, and the right choice
depends on one's financial goals. SIP is a flexible option for wealth creation across a range of
goals. NPS, however, is specifically built for retirement planning and offers a structured way to
build a long-term corpus along with tax benefits that few other schemes provide. For those planning
for retirement, NPS is a strong core investment. SIP can work well alongside it to add flexibility
and support other financial goals, making for a more balanced overall portfolio. So, don't compare
NPS vs SIP, combine the two to get a winning formula.
31 Aug 2026 
