NPS vs. Mutual Funds (SIP): Better Option for Retirement Plan?

After retirement you should have a portfolio that provides you both income and liquidity at the same time. It is important to invest the corpus amount in such a way that it has the flexibility to redeem it within a short notice.  Breaking the investments from the Senior Citizen Saving Scheme can result in a penalty; hence it is important to choose the schemes wisely between National Pension Scheme – NPS and Mutual funds (SIP). 

The schemes like NPS and mutual funds (SIP) can offer them high return and liquidity at the same time. But what scheme is best for your retirement planning, let’s understand.

Basis	NPS	Mutual Funds
Liquidity	The investor cannot withdraw money easily	Can easily withdraw the money
Withdrawal Limit	Not less than 3 years	1 year
Security	Government backed security though subject to market condition	Subject to market risks
Returns	Offers less returns	Higher returns

Liquidity

In a mutual fund, you can withdraw the money at anytime. There are certain exit loads and tax restrictions that you need to comply, otherwise there are no prohibitions. While on other hand in NPS, there are several restrictions on the money withdrawal. One restriction is the investor cannot take out the money except in cases of an emergency situation wherein you have the power to withdraw only 20% of your contribution after 3 years and the second option is you can’t withdraw the money before 10 years.

Tax liability

NPS Corpus is not tax free. The tax treatment is the main reason why many investors don’t prefer to join NPS. Only 40% of the amount is tax free, as compared to 100% in other retirement products like EPF and PPF. Since the NPS rules requires investors to put at least 40% of their amount into equity this eventually gets taxed as the pension is fully taxable. The investor effectively pays tax not only on the gains but also on the invested capital. The NPS investments are eligible for tax deduction upto Rs 1.5 lakh.

Tax on Mutual Funds

It depends upon the type of mutual funds that you are invested into.

Taxation on different kind of mutual funds
	Short Term Capital Gains Tax	Long Term Capital Gains Tax
Equity mutual funds	15%	10% on LTCG in excess of Rs 1 lakh
Balanced Mutual funds	15%	10% on LTCG in excess of Rs 1 lakh
Debt Mutual Funds	As per tax slab	20% after indexation

For SIP, all the gains won’t be tax exempted.  Only the profits earned through the SIP will be tax-free provided it has completed one year.  The rest of the gains will be subject to short term capital gains tax.

Security

Your investment choices depend upon the risk appetite, goals and time horizon. If you are seeking for a government based product that offers exclusive tax breaks to you after the retirement, then National Pension Plan is ideal for you, but if you don’t want to follow the restrictions, mutual funds are a way better option.

Returns 

The tabulated details clearly shows it’s the mutual funds that offer higher returns than NPS.

Mutual Fund vs. NPS (National Pension System)
In Rs.	MF	NPS+Debt	NPS+Equity
Yearly Investment	50,000	50000	50000
Total Investment	15,00,000	19,50,000	19,50,000
Total Cash Flow	15,00,000	15,00,000	15,00,000
Value at Retirement	1.35 Cr	1.08 Cr	1.33 Cr

Source – Buckfast Financial Advisory/Bloomberg Quint

Tenure

You can invest in the mutual funds for 1 year, 2 years or 5 years, depending upon the risk that you wish to take, but in NPS the lock in period is 3 years.

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NPS vs. Mutual Funds (SIP):Which is Better?

Both the investments have their own share of pros and cons, hence it is important to understand the purpose that you wish to achieve. Now, building wealth from scratch is not impossible, the investors need to invest regularly and save early, so that the savings can multiply.