NPS Vs SIP

NPS (National Pension Scheme) and SIP (Systematic Investment Plan) are popular investment options for short-term goals and post-retirement planning. SIPs in mutual funds suit specific short-term goals, while NPS is ideal for a stress-free retirement. Choosing between them requires careful planning.

For any investor, choosing between two different investment avenues or options is a common yet challenging part of investing. One such dilemma that you may need to make is the NPS vs SIP comparison. In this article, we delve into the meaning of the National Pension System (NPS) and Systematic Investment Plan (SIP), discover their features and look at how they are different from one another.

What is the National Pension System (NPS)?

The National Pension System (NPS) is a voluntary retirement savings scheme in India. It is an initiative designed by the Indian government to provide retirement income to all citizens. The Pension Fund Regulatory and Development Authority (PFRDA) is responsible for overseeing this scheme, so you can rest assured that your investments are transparent and secure.

If you opt for the NPS, you can invest in a pension account over the course of your employment. When you retire or when you attain 60 years of age, you can withdraw a part of the corpus as a lump sum amount. The remaining amount can be used to purchase an annuity that ensures regular pension payments after retirement.

NPS offers two types of accounts:

• Tier-I, which is a pension account with restrictions on withdrawal
• Tier-II, a voluntary savings account from which subscribers can withdraw money freely

The scheme is also quite flexible as you can choose your investment mix from among different options like equities, corporate bonds, government securities and alternative assets. Additionally, contributions to NPS are eligible for tax deduction under sections 80C and 80CCD of the Income Tax Act.

What is a Systematic Investment Plan (SIP)?

A SIP is a method of investing and not an investment scheme or option like the NPS. SIPs are most commonly used to invest in mutual funds. Here, you invest a small fixed sum periodically in the mutual fund of your choice. This is easier for the average retail investor than a lump sum investment, which requires a large capital outlay.

Investing in mutual funds via a SIP also gives you various other benefits like rupee cost averaging, compounded returns and the flexibility to choose your investment budget. What’s more, you can choose from different mutual funds with varying investment tenures that align with each of your financial goals.

This level of heightened flexibility is an important aspect to consider in your SIP vs NPS comparison. Before you start a SIP, however, you need to be clear about the amount that you want to invest each month and the returns that you expect. A SIP calculator can help you plan your SIP investments in mutual funds more smartly.

Difference between NPS and SIP

Now that you know the meaning of NPS and SIP as well as their key features, check out the SIP vs NPS comparison in the table below.

Tax implications on NPS and SIP

SIP investments in mutual funds have different tax treatments based on the type of fund and the holding period. Dividends earned from mutual funds are tax-free in the hands of the investor. However, capital gains are taxable and are classified as either short-term or long-term depending on how long you stay invested.

For equity and equity-oriented funds, gains are treated as long-term if the holding period is more than 1 year.

For debt funds, debt-oriented hybrid funds, and ELSS, gains become long-term only if the investment is held for more than 3 years.

Below is a summary of the tax treatment:

• Equity funds
  Long-term: 10 percent on gains above Rs. 1 lakh
  Short-term: 20 percent
• Debt funds
  Long-term: 20 percent
  Short-term: Taxed as per your income-tax slab
• ELSS funds
  Long-term: 10 percent on gains above Rs. 1 lakh
  Short-term: 20 percent
• Equity-oriented hybrid funds
  Taxed similar to equity funds
• Debt-oriented balanced funds
  Taxed similar to debt funds

For NPS, up to 60 percent of the corpus you withdraw at retirement is tax-free. The remaining 40 percent, which must be used to purchase an annuity, is taxed according to your income-tax slab.

Both NPS and ELSS SIPs qualify for tax benefits under Section 80C.

• Under Section 80CCE, NPS contributions up to Rs. 1.5 lakh are eligible.
• Under Section 80CCD(1B), an additional Rs. 50,000 deduction is available for NPS.
• ELSS investments also qualify for a deduction of up to Rs. 1.5 lakh under Section 80C.

NPS vs SIP - Which Is the Better Option to Choose?

Having seen the details of the SIP vs NPS comparison above, how do you know which of the two alternatives is better for your portfolio? Here are some pointers that can help.

Depending on the retirement goals, NPS may offer the following benefits.

• A long-term option to safeguard your retirement
• Tax benefits under sections 80C and 80CCD
• Government-regulated investment avenue
• A source of pension after you retire

Depending on the financial goals SIP in mutual funds may offer following benefits.

• Flexibility of withdrawing funds as needed
• An option to adjust the investment amount and pause the contributions as needed
• Comfort of liquidity and flexibility

Conclusion

The choice of NPS vs SIP in mutual funds or other schemes depends on various factors. Now that you know what these investment options entail, you can decide which of the two is a better fit for your portfolio.

If you decide to make SIP investments in mutual funds, you can check out the 1,000+ schemes listed on the Bajaj Finserv Mutual Fund Platform. With so many mutual fund schemes available, you can evaluate your options, compare mutual funds and choose those that align with your risk-reward preferences.

Calculate your expected investment returns with the help of our investment calculators