NPS vs. SIP: Difference Explained

Published on May 11, 2023 | 6 min read

Key Takeaways

NPS (National Pension System) is a government-backed savings scheme designed to help individuals build a retirement corpus.
A SIP (Systematic Investment Plan) lets you invest a fixed amount regularly in mutual funds to work towards different financial goals.
NPS is open to eligible individuals aged 18 to 70 years, while eligible investors can start an SIP in mutual funds after completing the required KYC process.

Investing wisely is a crucial step towards securing your financial future. Two popular investment options in India are the National Pension System (NPS), which is designed for retirement savings, and mutual funds, in which investors can invest regularly through a Systematic Investment Plan (SIP).

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Let’s explore NPS and SIP, and compare the two to make informed investment decisions.

What Is NPS?

The National Pension System (NPS) is a government-backed, voluntary, long-term retirement savings plan. It is designed to provide financial security to individuals in their post-retirement years.

Features of NPS

The following are the features of NPS.

Eligibility

NPS is available to eligible Indian citizens and other permitted categories of subscribers. The general entry age for individual NPS accounts is 18 to 70 years, subject to the applicable eligibility rules.

Contributions

Investors contribute to their NPS accounts, which are invested in various asset classes, including equities, corporate bonds, and government securities. The NPS offers Tier I and Tier II accounts. Tier I is primarily designed for retirement savings and has withdrawal restrictions, while Tier II generally allows more flexible withdrawals, subject to the applicable rules.

Tax Benefits

Eligible NPS contributions may qualify for deductions under Sections 80CCD(1) and 80CCD(1B), subject to the applicable limits and tax regime. An additional deduction of up to ₹50,000 under Section 80CCD(1B) is generally available under the old tax regime, while employer contributions may qualify for deductions under separate rules.

Withdrawals

When exiting NPS, subscribers can withdraw the permitted portion of their accumulated savings. Depending on the applicable exit rules and their circumstances, investors may need to use part of the remaining amount to purchase an annuity that provides regular income.

What Is SIP?

Systematic Investment Plan (SIP), on the other hand, is a popular investment method in mutual funds. It allows investors to regularly invest a fixed sum of money in mutual funds.

Features of SIP

The following are the features of SIP.

Eligibility

Eligible investors can start an SIP in a mutual fund after completing the required registration and KYC process. Minors can invest through a parent or legal guardian, subject to the applicable rules.

Contributions

Investors can set up SIPs in mutual funds of their choice, allowing them to invest regularly (monthly, quarterly, etc.) with a predetermined amount. The invested amount is used to purchase mutual fund units at the prevailing Net Asset Value (NAV).

Tax Benefits

Investments in eligible ELSS mutual funds may qualify for deductions of up to ₹1.5 lakh under Section 80C if the investor opts for the old tax regime and meets the applicable conditions. ELSS investments have a three-year lock-in period.

Withdrawals

Investors can generally redeem units of open-ended mutual funds when needed, subject to the scheme's rules, any applicable exit load, and tax requirements. However, some funds, such as ELSS, have a lock-in period.

Comparing NPS vs. SIP

The following is a detailed table that compares NPS and SIP.

Aspect	NPS	SIP
Investment goals	NPS primarily focuses on building a retirement corpus. It is intended for long-term financial security, and withdrawals before retirement are limited and come with certain conditions.	SIP can help investors work towards different financial goals, such as buying a home, funding a child's education, or saving for retirement. Withdrawals depend on the mutual fund scheme, and some schemes, such as ELSS, have a lock-in period.
Investment horizon	NPS is designed mainly for retirement savings and has rules governing partial withdrawals and exits. The permitted withdrawal amount and timing depend on the subscriber category and the applicable NPS rules.	SIP offers flexibility in terms of the investment horizon. Investors can choose short-term, mid-term, or long-term investment objectives.
Risks and returns	The returns in NPS depend on the asset allocation chosen by the investor. It can range from conservative (investing more in fixed income securities) to aggressive (investing more in equities). NPS returns depend on the investment options selected, market conditions, and the performance of the underlying assets. Returns are market-linked and are not guaranteed.	The risk and returns in SIP depend on the mutual fund chosen. Equity mutual funds have the potential for higher returns but come with higher volatility. Debt mutual funds generally invest in bonds and other fixed-income securities. Their risk and potential returns depend on factors such as credit quality, interest-rate changes, and the type of fund. Diversification through various mutual funds can help manage risk.
Tax benefits	Eligible NPS contributions may qualify for tax deductions, depending on the applicable tax regime and rules. The additional deduction of up to ₹50,000 for eligible contributions is available under the old tax regime, while eligible employer contributions may qualify for deductions under separate provisions. The tax treatment of withdrawals and annuity income depends on the applicable tax rules and the subscriber's circumstances. However, a portion of the corpus is taxable at the time of withdrawal.	Investments in eligible Equity-Linked Savings Schemes, or ELSS, may qualify for tax deductions of up to ₹1.5 lakh under the old tax regime, subject to applicable conditions. ELSS investments have a three-year lock-in period. For eligible equity-oriented mutual fund investments, long-term capital gains exceeding ₹1.25 lakh in a financial year are generally taxed at 12.5%, subject to the applicable rules and exceptions.
Liquidity	NPS offers limited liquidity before retirement, with strict conditions for withdrawals. It is primarily meant for long-term savings.	Many open-ended mutual funds allow investors to redeem units when needed, subject to applicable rules, settlement timelines, and any exit loads. However, some schemes, such as ELSS, have a lock-in period, so liquidity depends on the fund selected.

The National Pension System (NPS) is a savings scheme designed to help people save for retirement. A Systematic Investment Plan (SIP) is a way to invest a fixed amount regularly in mutual funds.

NPS is an investment vehicle for people who want to build a retirement fund, while SIPs can help investors save for various financial goals. Both have different risk levels, potential returns, tax benefits, and withdrawal rules.

FAQs

What is the main difference between NPS and SIP?

NPS is a savings scheme for retirement, while SIP is a way to invest money regularly in mutual funds.

Can I invest in both NPS and SIP?

Yes, you can invest in both to save for retirement and other financial goals.

Which offers tax benefits, NPS or SIP?

Eligible NPS contributions and investments in ELSS mutual funds may offer tax benefits, depending on the tax regime and applicable rules.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.