Rs 15,000 monthly investment for 20 years: NPS or mutual funds? Know which may leave you with a bigger retirement corpus

A lot of investors trying to build their retirement corpus often face a common dilemma: Should they go for the National Pension System (NPS) or keep investing in equity mutual funds through SIPs?

While mutual funds offer flexibility and potentially higher returns, NPS provides unique tax advantages and is among the lowest-cost retirement products available in India.

That said, it is not easy to compare the two since their portfolio allocation, taxation and withdrawal rules differ significantly.

How much corpus can NPS and mutual funds generate over 20 years?

Let’s check out how a monthly investment of Rs 15,000, which goes up by 5% every year, can grow over 20 years in NPS and mutual funds.

Source: Pensionbazaar

The comparison assumes annual returns of 12.79% for large-cap funds, 16.27% for mid-cap funds, 17.35% for small-cap funds, and 15.47% for an equal-weight mutual fund portfolio.

The above mutual fund return assumptions are based on the average 10-year category returns, referenced from industry/Value Research data.

For NPS, a 75% equity and 25% debt allocation is assumed, with expected returns of 14% and 8% respectively, resulting in a blended return of 12.5% per annum. Mutual fund returns are adjusted for a 12.5% LTCG tax on gains, while NPS assumes that 60% of the corpus is withdrawn as a tax-free lump sum and 20% is used to purchase an annuity at exit.

Out of the NPS corpus, approximately Rs 1.21 crore can be withdrawn as a lump sum, while about Rs 80.8 lakh is invested in an annuity.

Under these assumptions, the mutual fund portfolio generates a pre-tax corpus of about Rs 2.81 crore against nearly Rs 2.02 crore through NPS. The higher corpus is primarily a result of the mutual fund portfolio’s higher equity exposure and higher assumed return.

However, the headline corpus figures do not tell the complete story. Taxation and withdrawal rules can significantly influence the final amount available to investors at retirement.

After accounting for long-term capital gains (LTCG) tax, the mutual fund corpus falls to about Rs 2.53 crore. In contrast, NPS allows up to 60% of the accumulated corpus to be withdrawn tax-free at maturity.

“Of the remaining 40% of the NPS corpus, at least 20% must be used to purchase an annuity. The annuity purchase itself is tax-free; however, the pension income received from the annuity is taxable as per the subscriber’s applicable income tax slab,” says Goel.

As for the balance 20%, subscribers can either invest it in an annuity or withdraw it as a lump sum. If invested in an annuity, the purchase is tax-free and only the pension income is taxed. If withdrawn as a lump sum, the amount is added to the subscriber’s income and taxed according to the applicable tax slab,” he adds.

Are NPS and mutual funds directly comparable?

Not entirely. The mutual fund portfolio in this illustration is effectively a 100% equity portfolio comprising large-cap, mid-cap and small-cap funds. In contrast, the NPS portfolio assumes a 75% allocation to equity and 25% allocation to debt.

This means the MF portfolio has a higher expected return and higher volatility.

“For a fair like-for-like, compare a 100% large-cap MF (returning ~14%) against NPS equity at 100% allocation (~14%). At equal returns, the difference comes down entirely to taxation and costs. NPS has the lowest costs in the industry, giving it a slight edge, partially offset by MF’s more liquid taxation structure,” says Vishwajeet Goel, Head of Pensionbazaar.com.

In the above calculation, we have assumed mutual fund returns on the higher side, particularly for mid-cap and small-cap funds. Since these categories are more volatile, actual returns may be lower in the future.

When does NPS have an advantage?

NPS can be particularly attractive for investors focused on tax efficiency.

NPS becomes particularly attractive when an employer contributes to the employee’s account under Section 80CCD(2).

“If your employer offers corporate NPS and contributes to your account under 80CCD(2), up to 14% of your basic+DA is deducted from taxable income, above the ₹1.5L 80C ceiling and available even under the new tax regime,” says Goel.

This is the single most tax-efficient retirement benefit available to a salaried employee in India, essentially converting a portion of your CTC into a tax-free contribution, he adds.

Additionally, investors who choose a higher equity allocation within NPS can potentially improve long-term returns.

When can mutual funds have an advantage?

One of the biggest advantages of mutual funds is complete control over the accumulated corpus. Unlike NPS, mutual funds do not require investors to allocate a portion of the corpus towards annuity.

“Your entire MF corpus is yours to deploy as you choose. NPS mandates annuitising at least 20–40% at modest 5–6% annuity rates,” says Goel.

Tax treatment of NPS withdrawals investors should know

The tax treatment of NPS withdrawals remains one of its key advantages, although investors should understand how different components are taxed.

Source: SK Patodia & Associate LLP

NPS vs mutual funds: Which should investors choose?

The answer depends on what you value more. Those seeking higher growth potential, liquidity and complete control over their retirement corpus may prefer mutual funds.

On the other hand, investors focused on tax efficiency, lower costs and disciplined retirement investing may find NPS more suitable. Rather than treating them as competing products, many financial planners view them as complementary tools.