NPS vs SIP - Which is Better ?

National Pension Scheme (NPS) and the Systematic Investment Plan (SIP) are two popular investment instruments for retirement planning. But investors are always faced with the usual debate: NPS or SIP, which one is better? Here’s a detail on both the investments and their advantages:

A Systematic Investment Plan (SIP) is one of the most sought after investments across all age groups. Through SIP, a fixed amount is deducted periodically to invest in mutual funds.

• Convenient and disciplined investment: An SIP amount can be as low as Rs. 500, thus making it an affordable saving during budget constraints. Besides, you can link your bank account to your SIP, thus automating the payments without you having to remember payment dues. The automated deduction also teaches the discipline of expenditure and saving.
• The benefit of compounding: The compound interest earned on long-term investments adds to your corpus compared to a lump sum one-time investment.
• Provides higher return: Investment in equity funds generate higher inflation-beating returns compared to other asset classes.
• Rupee cost averaging: When the market is down, you can buy more shares and later sell these shares when the market rises. The rupee cost averaging in SIP allows you to reduce the cost of investment.
• Contingency fund: The investment amount can be withdrawn at any time. This flexibility is a great benefit when you are faced with medical expenses or unforeseen crisis.

National Pension Scheme (NPS) is a government-backed scheme for private, public and government sector workers. Under this scheme, employees have to invest through their work tenure. On retirement, you can withdraw a certain amount of the corpus while the remaining is offered as a monthly retirement pension.

• Voluntary investment: Under the scheme, you are allowed to choose the amount as well as the time of investment.
• Low-risk: The investment of shares doesn’t go beyond 50% under this scheme. With the low equity investment, you are lesser prone to market fluctuations.
• The benefit of flexibility: The scheme allows the investment in funds at your discretion which gives you great opportunities to expand your wealth.
• Transparent investment: Regulations by Pension Fund Regulatory and Development Authority (PFRDA) ensure safer investments with regular tracking by fund managers under NPS.

When comparing NPS vs SIP, do take into account the lock-in period and tax benefits of both investment instruments. The SIP has a minimum three-year lock-in period while NPS allows withdrawal after your retirement or after the age of 60.The SIP and NPS investments are exempted from tax under Section 80C of the IT Act, 1961. Long-term Capital Gains Tax (LTCG) is applicable to the returns of SIP mutual funds. In the case of NPS, you receive 60% of the amount on retirement, out of which 20% is subject to tax.

This will entirely depend on your current age, the age you plan to retire, the investment duration and the retirement fund amount. If you are looking for a low-risk and safer investment over a longer period, NPS is a perfect choice. But if you are open to market risks and have shorted financial goals, choose SIP.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.