NPS vs SIP: A Complete Guide to Smart Retirement Planning | Image:
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Pension plans play a vital role in providing a comfortable & financially secure retirement, ensuring a regular source of income when they are not working. Retirement Planning means planning towards the financial future post-retirement, which will include setting objectives & assessing the income requirements & expenditures. The two popular plans most discussed are SIP & NPS, where NPS is a government-backed plan, & SIP includes building long-term wealth. To make an informed decision about which one to choose as a retirement plan, let us discuss them in detail.
SIP stands for Systematic Investment Plan, which includes investment in mutual funds with the help of the contribution of a pre-determined amount of money at pre-determined regular intervals of time. This plan helps maintain a healthy savings plan & restricts the complexities of tracking market-related fluctuations. It is best suited for salaried & first-time investors who want to make small investments which will grow with a compounding factor.
The National Pension Scheme, backed by the Government of India, offers financial security to individuals during their retirement years. This plan is meant for private, public, & unorganised sector employees, except for armed forces staff. It is considered to be a reliable Retirement Plan, which offers flexible investment options, tax benefits, & market-linked returns. Individuals can undertake retirement planning by investing funds regularly during their careers to build a corpus for a secure financial future.
Difference between SIP & NPS
Provided are the differences between SIP & NPS:
| Point of Difference | SIP | NPS |
| Investment Objectives | It is an all-rounder investment plan, which can be used for multiple purposes, such as child higher education, purchase of property, retirement plan, etc. | This plan is designed just for retirement purposes, offering financial security. |
| Investment Horizon | It allows flexibility in choosing the duration, i.e. short, mid, or long-term, depending on your financial objectives. | This plan is meant for long-term financial goals, where withdrawals are permitted once you achieve 60 years of age. |
| Risks & Returns | It depends on the type of plan opted for. This means that in case of debt, lesser risk & lesser returns, & in equity, higher returns & higher risks. One can manage risks by diversification of funds. | It depends on the type of allocation made by an investor using an aggressive, i.e. equity or conservative approach, i.e. fixed income securities. |
| Tax Benefits | The funds invested in ELSS are eligible for tax deductions. Also, LTCGs on equity funds are also exempt from tax up to INR 1 lakh yearly. | The contributions made are eligible for tax deductions u/s 80C along with additional contributions for a maximum of up to INR 50,000 u/s 80CCD (1B). |
| Liquidity | Greater liquidity | Limited liquidity |
Provided are the benefits of SIP:
• Diversification:
It includes investments in multiple asset classes, which include debt, equity, or hybrid funds.
• Potential for Growth:
If left for a longer period, this scheme offers higher returns, depending upon the market situations & choice of funds.
• Flexibility:
It provides flexibility while making contributions to the fund, i.e. it can be started, stopped, increased, or decreased at any time without penalties.
• Rupee Cost Averaging:
While making regular investments, more units can be bought when prices are low & fewer units can be bought when prices are high, helping to average the cost of mutual funds.
• No Fixed Lock-In:
There is no fixed lock-in period, except for Equity Linked Saving Schemes (ELSS), which come with a lock-in period of 3 years.
• Customisation:
The frequency of investment & amount of contribution can be chosen depending upon the financial objectives.
Provided are the benefits of NPS:
It offers flexibility in the selection of tenure & amount according to the financial objectives & risk appetite.
The National Pension Scheme is governed by the NPS Trust & managed by the Pension Fund Regulatory & Development Authority.
• Tax Advantages
It provides tax advantages to both self-employed & salaried individuals.
a) Section 80CCD (1)
Get a tax deduction, maximum up to INR 1,50,000 u/s 80C.
b) Section 80CCD (1B)
Get an additional tax deduction of a maximum of INR 50,000 u/s 80C.
• Voluntary Participation:
This scheme can be availed by any Indian resident between 18 & 70 years.
• Cost-effective
It offers low-cost & economical long-term plans.
Even in circumstances of a job change or any relocation, the National Pension Scheme Account remains the same.
• Superannuation Fund Transfer
The funds from the superannuation account can be transferred to the National Pension Scheme account.
NPS or SIP: Which is better?
NPS is a long-term investment plan that ensures receipt of a pension post-retirement. As the funds are invested in equity, they are more exposed to risks, hence reap higher returns. These plans best suit those who can accept risks but want to safeguard their retirement period with fixed earnings.
On one hand &, SIPs are linked to the market, still offering flexibility, depending on the withdrawal amount, investment frequency, & investment amount. They offer high returns due to being linked to the market & are highly liquid. Hence, to choose one between the two, the choice will wholly depend upon the risk tolerance level, financial objectives, investment tenure & investment horizon.
SIPs should be chosen in case of the following:
• In case only investments are required & not insurance.
• In case you are ready to accept market-related risks.
• In case you need a high level of liquidity & want to get units redeemed at any point in time.
• If you want high returns & low charges.
NPS should be chosen in case of the following:
• In case you want to opt for long-term savings with low risks.
• In case you want to avail taxation benefits u/s 80C & 80CCD.
• In case you are looking for retirement plans.
Hence, NPS is suitable if you are looking for a long-term retirement plan with taxation advantages. On the contrary, SIPs offer higher returns along with liquidity & flexibility, which makes it perfect for some specific financial objectives. Additionally, one can consult a financial advisor to make an informed decision about the selection.