SIP vs NPS: If you invest ₹5,000 per month, how large a corpus will be created in 30 years? Understand the full calculation..

SIP vs NPS: Investing ₹5,000 per month for retirement can result in a substantial sum. Over a long period like 30 years, it can build a significant corpus. However, the real question is: should you invest that ₹5,000 in an SIP or the NPS? To simplify the comparison, let's assume different rates of return for each: an average annual return of 12% for SIPs and 10% for the NPS.

Let’s assume the investment begins at age 30, with ₹5,000 invested monthly for 30 years. This means a total of ₹18 lakh will be invested by the time one reaches age 60.

How large will the corpus be after 30 years?

With an average return of 12%, a monthly SIP investment of ₹5,000 could grow to a corpus of approximately ₹1.76 crore. With an average return of 10% in the NPS, the corpus could reach around ₹1.14 crore.

In this scenario, the estimated SIP corpus would be about ₹62 lakh higher than that of the NPS.

Parameter    SIP    NPS
Monthly Investment    ₹5,000    ₹5,000
Investment Tenure    30 years    30 years
Total Investment    ₹18 lakh    ₹18 lakh
Estimated Annual Return    12%    10%
Estimated Corpus    ₹1.76 crore    ₹1.14 crore
Estimated Returns    ₹1.58 crore    ₹96 lakh

Why does the SIP generate a larger corpus?

There is only a 2% difference in the rate of return. However, over 30 years, the power of compounding significantly amplifies this gap. With an SIP, a total investment of ₹18 lakh can grow to approximately ₹1.76 crore at a 12% average return; this implies that the estimated returns alone could amount to around ₹1.58 crore.

However, a 12% return is not guaranteed. Equity mutual funds are market-linked; returns can be very high in some years, while losses may occur in others.

How much corpus will the NPS generate? Assuming an average return of 10% in the NPS, a monthly investment of ₹5,000 could grow to approximately ₹1.14 crore over 30 years. Your total investment would be ₹18 lakh, while the remaining ~₹96 lakh would represent the estimated return.

The objective of the NPS is to build a retirement corpus over the long term. Since investments are market-linked, there is no guarantee of a 10% return.

**Different Exit Rules for NPS**

The biggest difference between NPS and SIP lies in the withdrawal process. NPS does not allow you to withdraw the entire corpus at your discretion upon retirement. Under current rules for a standard exit, non-government subscribers have the option to withdraw up to 80% of the amount as a lump sum and must invest at least 20% in an annuity. Different rules may apply to smaller corpus amounts.

Annuities provide a regular income post-retirement; however, the pension amount depends on the annuity rate and the chosen plan.

**Easy Withdrawals with SIP**

SIPs do not have such a lock-in structure. You can sell your units whenever needed, subject to the rules of the specific mutual fund scheme.

This is a key advantage of SIPs. Funds can be utilized for needs other than retirement—such as buying a home or funding children's education.

**Difference in Taxation**

SIPs and NPS have different tax treatments. Taxation for SIPs depends on the type of mutual fund and capital gains; therefore, the entire corpus accumulated over 30 years cannot be considered tax-free.

NPS also has distinct tax rules regarding lump-sum withdrawals and annuities. The pension received later from the annuity is treated as part of your income and taxed according to applicable regulations.

**So, SIP or NPS?**

If high liquidity and flexibility are your priorities, an SIP might be the better choice. Conversely, if your goal is to build a dedicated retirement fund and maintain a long-term investment, the NPS structure could prove beneficial. In this example, the estimated corpus for a monthly SIP investment of ₹5,000 is ₹1.76 crore, while for NPS, it is approximately ₹1.14 crore. However, one should not make a decision based solely on the size of the corpus; it is also important to consider factors such as returns, liquidity, and exit rules.

Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.