Investment Plans

Investment Battle - NPS vs SIP! Which is a Better Investment Plan?

By Admin
Mar 04, 2021
nps vs sip which is a better investment plan

There isn't a single person out there who does not want a financially secured retirement, including you. This is exactly the reason why you need to invest your money smartly in the right securities. NPS (National Pension Scheme) and SIP (Systematic Investment Plan) are two of the best investment avenues that can do the job for you.

What is an NPS?

An NPS is a scheme that was introduced by the Indian government back in 2004. Even though it was just for employees in the public sector initially, it was made available to all citizens from 2009. Through your employment, you can invest money in this scheme. At the time of retirement, you can withdraw up to 40% of the corpus as a lump sum amount. You can then reinvest a portion of the remaining 60%, while the rest will be credited to you on a monthly basis.

What is an SIP?

An SIP is a simple structure that enables you to invest in mutual funds, through which you can invest a specific amount periodically. In this, you can enjoy returns on a regular basis through dividends. You can invest in a variety of securities, be it fixed-income or market-linked ones.

Retire Smartly: Know the Difference Between NPS and SIP

To help you gain a better understanding of what might be the better option for you, we have compared the two in this table, and then explained the tax implications on both as well.




Investment Flexibility

In an NPS, there is no hard and fast rule that asks you to invest in the scheme regularly. You have the freedom to choose when to invest and when not to.

In an SIP, it is necessary for you to invest periodically. However, the interesting thing is that this investment can be as low as INR 500. As a result, it should not put any kind of financial burden on you.

Risk factors

It is a low-risk investment option. Only 50% of the investment capital is allowed to be invested in equities or stock, which makes it a safe option for you. The market volatility will have a lesser impact in this case.

With SIPs, the risk factor is slightly more as the market volatility can have an impact on the investment. This is the reason why it is advised to diversify your SIP investments. It will keep your overall returns stable even if some of the investments take a hit.

Investment options

NPS offers two investment options – active choice investment and auto choice investment. The former enables you to choose the securities you want to invest in, based on your risk appetite. In the latter option, it is the scheme manager that decides the securities you should invest your money in, based on your age slab.

Mutual funds through SIPs offer a wide variety of investment options that you can try. Equity funds, hybrid funds, ELSS and debt funds are some of the top investment options. Hybrid funds can turn out to be the ideal option if you are looking to diversify your investment portfolio and still enjoy high returns. Therefore, it is perfect for people who are thinking of long-term benefits.


Since NPS offers limited exposure to equities and shares, it automatically limits the potential of earning big. Such funds, on an average, give you 8-10% returns annually. However, one thing to note here is that an NPS gives you a better yield than other fixed-income securities.

In terms of returns, SIPs will give you more returns than an NSP. Since you can invest more money in equities and shares, you will be able to enjoy higher returns if the market supports you. Ideally, you should be able to enjoy returns in the range of 14-18% over a long period of time.


NPS has quite a rigid withdrawal system, where you cannot withdraw any amount unless there is an emergency. To start with, you can only withdraw 25% of the total amount and that too if only in cases like your child’s marriage or education or medical emergencies. Note that this is only allowed to happen 3 times in the whole term and there must be a gap of 5 years between two such instances.

Except in the case of ELSS funds (3 year lock-in period), you can withdraw your investments any time you want. In fact, once you feel like you’ve got a large enough retirement corpus, you can slowly start the withdrawal process. This can very well work as a source of monthly income for you.

Tax implications on both NPS and SIP

Investing in both NPS and SIPs allow you to enjoy tax benefits under Section 80C.

Both NPS and SIPs have different tax implications on investment returns, which are discussed below.

Tax implication on SIP returns:

In terms of enjoying tax benefits in SIPs, there is no tax applicable for the dividends you earn. However, the capital gains are taxable, depending on the duration of the fund. We have explained this in the following table to give you a better understanding of the tax implications on different funds.


Long-term Capital Gain Tax

Short-term Capital Gain Tax

Equity Funds

10% on the amount more than INR 1 Lakh


Debt Funds


Taxes will be applied as per the slab rate

ELSS Funds

10% on the amount more than INR 1 Lakh


Equity-oriented hybrid funds

As per equity fund taxation

As per equity fund taxation

Debt-oriented balanced funds

As per debt fund taxation

As per debt fund taxation

Note that for an equity fund and an equity-oriented balanced fund, the tenure has to be more than a year if it has to be counted as a long-term investment. On the other hand, the tenure has to be more than 3 years to be counted as a long-term investment in the case of a debt fund, debt-oriented hybrid fund or ELSS fund.

Tax implication on NPS returns:

Now coming to the NPS, you can enjoy tax-free benefits up to 60% of the total corpus amount. However, once you reinvest the remaining 40% in an annuity, it will be taxable under the corresponding tax slab.


Now that you know the differences between the two, you should have an idea of the one that is ideal for you. In a nutshell, if you have plans to retire early, then it is advisable to go for SIPs because of the flexibility they offer. However, if you are looking for a stable investment option that will aid your retirement phase, then an NPS is the right option. 

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