NPS vs Mutual Funds in India - Know the Difference

Explore the key differences between NPS (National Pension System) and Mutual Funds in India to make informed investment decisions.
4 mins
17 Feb 2024

Investment planning is a crucial aspect of financial stability, and two prominent avenues that often come to mind are the National Pension System (NPS) and Mutual Funds. Each offers unique advantages, catering to different financial goals and risk appetites. Let us understand the details of NPS and Mutual Funds, highlighting their differences and tax implications to help you make informed investment choices.

What is the National Pension Scheme (NPS) and who Should Invest in it?

The National Pension Scheme is a government-backed, long-term retirement savings scheme designed to provide financial security during one's post-retirement years. It encourages systematic savings and investment in a mix of equity and debt instruments.

NPS is ideal for individuals looking to secure their retirement and willing to invest for the long term. Government employees and self-employed individuals can benefit greatly from NPS.

What are Mutual Funds and why Invest in them?

A Mutual Fund is a professionally managed investment scheme that pools money from multiple investors to invest in diversified assets like stocks, bonds, or a mix of both depending on the investment objective of the scheme. It offers investors a share in the fund's returns and risks.

Mutual Funds provide diversification, professional management, and liquidity. They cater to various financial goals, whether short-term or long-term, making them suitable for a wide range of investors.

Differences Between NPS and Mutual Funds

1. Objective:

  • NPS: Primarily designed for retirement planning, with restrictions on withdrawal.
  • Mutual Fund: Offers flexibility for various financial goals, including wealth creation, regular side income or tax-saving (ELSS funds which come with 3 year lock-in period).

2. Investment Options:

  • NPS: Invests in equity (E), corporate debt (C), government bonds (G) and alternate investment funds (A) as per the investor's choice.
  • Mutual Fund: Provides numerous fund categories, including equity, debt, hybrid, and thematic funds, offering a broader range of investment choices.

3. Lock-in Period:

  • NPS: Tier I NPS, the mandatory NPS account, has withdrawal limitations. Full withdrawal is only allowed after 10 years or at age 60, but partial withdrawals up to 25% are permitted under certain conditions. However, investment freedom is limited, with a maximum of 75% allowed in equities within NPS.
  • Mutual Fund: Offers schemes with various lock-in periods, and many have no lock-in, providing liquidity when needed.

4. Regulation:

  • NPS: Regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
  • Mutual Fund: Regulated by the Securities and Exchange Board of India (SEBI).

5. Risk Profile:

  • NPS: Although NPS invests in market securities it is generally considered less risky as the allocation to equity decreases as the retirement age approaches.
  • Mutual Fund: Risk levels vary based on the chosen funds, ranging from low to very high risk.

Lock-in period

The ELSS mutual funds has a three-year lock-in period, while the NPS scheme features an extended lock-in period until retirement, making it considerably longer than that of ELSS, which is primarily a tax-saving fund. Under NPS, complete withdrawal of your investment is only allowed after a minimum of 10 years or upon reaching the age of 60. Nonetheless, partial withdrawals can be made under specific circumstances, with a maximum limit set at 25% of the total contributions made by the subscriber.

Tax Implications on NPS and Mutual Funds

  • NPS: At retirement, NPS offers tax-free benefits on 60% of the corpus, while the remaining 40% reinvested in an annuity is taxable based on the individual's tax slab. NPS provides tax exemption up to Rs. 1.5 lakh under Section 80CCE and an additional Rs. 50,000 under Section 80CCD.
  • Mutual Fund: Offers tax benefits under Section 80C for ELSS (Equity-Linked Savings Schemes) and capital gains tax advantages based on the fund's holding period. Equity Mutual Funds held for over one year qualify for long-term capital gains (LTCG) tax at 10% on gains above Rs 1 lakh. Debt Mutual Funds have a tax advantage if held for more than three years, with indexation benefits.

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


Choosing between NPS and Mutual Funds depends on your financial goals, risk tolerance, and investment horizon. NPS is a compelling option for retirement planning, offering exclusive tax benefits. On the other hand, Mutual Funds provide flexibility, a wider array of choices, and liquidity, making them versatile tools for various financial objectives. To make the right decision, consider consulting a financial advisor who can tailor an investment strategy to meet your specific needs. Ultimately, a diversified portfolio that combines both NPS and Mutual Funds might offer the best of both worlds, catering to both your long-term retirement goals and short-term financial aspirations.

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Frequently asked questions 

Are mutual funds and NPS regulated by the same body?

No, mutual funds and NPS are regulated by different entities in India. The Securities and Exchange Board of India (SEBI) regulates mutual funds, while the Pension Fund Regulatory and Development Authority (PFRDA) governs the National Pension System (NPS).

Is NPS deductible under 80C of the Income Tax Act 1961?

Contributions made towards the National Pension System (NPS) are eligible for tax benefits under Section 80CCD(1).