NPS Tier II vs. Mutual Fund

NPS Tier II Account Overview

The NPS Tier II Account is a voluntary and flexible investment option available under the National Pension System in India. It functions as an add-on account for individuals who already hold an active Tier I account. Though connected to a retirement-focused pension plan, it allows investors to withdraw funds anytime without penalties. The account requires a minimum initial contribution of ₹1,000, with subsequent deposits of at least ₹250. It is regulated by PFRDA and offers controlled asset allocation across equity, corporate bonds, and government securities

NPS Calculator

Your Age

Years

18 Years 59 Years

Enter Your Age

Monthly Investment

₹

₹500 ₹10L

Enter Investment Per Month

Expected Return on Investment

%

5% 15%

Expected Return on Investment

Percentage of Corpus Allocated for Pension

%

40% 100%

Enter Corpus Percentage

Expected Return from Pension

%

5% 15%

Enter Annuity Return

₹0

Your Monthly Pension

View Plans

₹0

Your Monthly Pension

View Plans Your Pension Calculation

Your Pension Calculation

Total Investment

Returns Earned

Maturity Amount

Maturity Amount split (Lumpsum & Pension)

60%

Lumpsum Amount

At the age of 60 Yrs

40%

Pension Wealth

At the age of 60 Yrs

View Plans

Mutual Funds Overview

Mutual funds are a standard form of investment that pools money from multiple investors into one huge portfolio diversified in stocks, bonds, or other securities. They offer you professional management with easy accessibility, so you get the advantages of diversification, liquidity, and professional expertise.

Mutual funds are established and regulated by the Securities and Exchange Board of India (SEBI) and are explanatory in nature, which include equity funds, bond funds, and hybrid funds. This allows them to cater to different risk-taking predispositions and investment objectives.

Difference Between NPS Tier II Account and Mutual Fund Schemes

Find the key differences between NPS Tier II account and Mutual Fund schemes: 

NPS Tier-II vs. Mutual Fund: Which is Better?

You can decide the best investment option for you among the Mutual Fund vs. NPS Tier II account as per the following key considerations:

Choose NPS Tier-II if:

• Retirement is Your Focus: Tier-II offers flexible access to funds and is suitable for long-term retirement goals.
• Lower Fees Appeal to You: The Tier-II has a lower expense ratio than most mutual funds.
• You Have Long-Term Goals: It allows equity investment between 50% and 75% for long-term growth.

Choose Mutual Funds if:

You Need Flexibility: The funds give you access to your money in a simple manner with no lock-in.

• Specific Goals Matter: A wide range of fund options caters to distinct financial objectives, such as child education or holidays.
• Higher Risk Appetite Drives You: Some funds can take equity exposure higher to maximise returns.

Tax Benefits for NPS

NPS allows you to reduce your tax burden through specific deductions available under the Income Tax Act.

Section 80CCD(1): Employee's Own NPS Contribution

Example Scenario:

• Rahat's Basic + DA = ₹7,50,000/year
• 10% of ₹7,50,000 = ₹75,000
• She can claim ₹75,000 under Section 80CCD(1)
• But the total claim from this section cannot exceed ₹1.5 lakh

Section 80CCD(1B): Additional NPS Deduction Over Standard Limit

Example:

• Rahat has already claimed ₹1.5 lakh in deductions through investments like PPF, EPF, and LIC
• She contributes an additional ₹50,000 to her NPS account
• This ₹50,000 qualifies as a separate deduction under Section 80CCD(1B)
• Since it does not fall under the standard ₹1.5 lakh cap, she gets an extra tax benefit
• In total, Rahat can now claim deductions up to ₹2 lakh, ₹1.5 lakh from other savings, and ₹50,000 under this section

Section 80CCD(2): Employer's Contribution to NPS

Example:

• Rahat's Basic + Dearness Allowance totals ₹8,40,000 per year
• Her employer contributes ₹84,000 (10% of ₹8,40,000) to her NPS account
• This full amount is deductible under Section 80CCD(2)
• It is separate from the ₹2 lakh Rahat may already claim through her own contributions under Sections 80CCD(1) and 80CCD(1B)
• This gives her additional tax relief without affecting her personal investment limits

Mutual Fund Tax Benefit

Mutual funds offer tax benefits through lower tax rates on long-term capital gains, which apply when investments are held for longer periods. The tax on these gains is lower compared to short-term gains, making long-term holding more efficient.

Section 80C

• Investment Deduction: Reduce taxable income by investing up to ₹1.5 lakh.
• Growth Opportunity: Get potential returns from equity-based investments along with tax benefits.
• Fixed Holding Period: Funds stay locked for 3 years, shorter than other options.

Example:

• Rina invests ₹1,50,000 in a mutual fund that qualifies for tax savings, which helps lower her taxable income right away.
• She keeps the money invested for three years, knowing it's locked but shorter than other tax-saving plans.
• After three years, not only has Rina saved on taxes, but she also earns extra from the fund's market-linked growth, enjoying both savings and returns.

Conclusion

NPS Tier II and mutual funds cater to different financial priorities. If your primary objective is retirement planning with regulatory oversight and low costs, NPS Tier II is a suitable option and risk tolerance defines the best SIP investment strategy. On the other hand, if you are looking for a best investment option that supports multiple life goals with broader diversification and flexibility, mutual funds may be more suitable.

Before choosing, evaluate your investment horizon, risk tolerance, tax situation, and overall financial strategy to ensure the selected option aligns with your long-term goals.