NPS vs Mutual Funds: Post-Tax Returns Comparison 2025 India

Most Indians have a clear investing aim: create a steady financial base for the future. Whether it is early retirement, children’s education, or a comfortable life after work, the two common long-term choices are the National Pension System (NPS) and mutual funds.

On the face of it, both offer market-linked growth. But what matters is not only how much they grow; it is how much you keep after taxes and withdrawal rules. In 2025, with major tax changes and NPS updates, the gap between them is more subtle than many investors think.

NPS vs Mutual Funds: The Basics

Before comparing returns, it helps to understand what each option is designed to do.

NPS is a government-supported retirement savings plan. You put in money regularly; it is invested in equities, corporate bonds, and government securities, and you can withdraw after age 60, with some conditions. It suits long-term retirement saving and gives tax advantages in some instances.
Mutual funds collect investors’ money and invest across asset types: equity, debt or both. They come in many schemes, from high-risk small-cap equity funds to low-risk debt funds, and they can serve any goal, not just retirement. There are no compulsory annuities or fixed withdrawal rules, and they suit investors with varied time horizons and needs, too.

Returns Over Time — What the Numbers Say

In recent years, equity mutual funds have given some of the strongest returns, especially in small-cap and theme-based categories. At the same time, NPS equity plans have improved their returns but stay more cautious due to rules that limit equity exposure.

Investment Type	Average 5-Year Return (as of 2025)	Range
Equity Mutual Funds (Large/Mid/Small Cap)	12% – 16%	Some small-cap funds crossed 40–50% annually during recent rallies
NPS Equity Plans (Tier I)	13% – 17%	The return depends on the chosen fund manager and the equity allocation.
NPS Government / Debt Plans	6% – 9%	More stable, lower volatility

Key point: Mutual funds usually allow 100% equity allocation, which can help long-term growth, while NPS caps equity at about 100%. This basic difference often gives mutual funds an edge on raw returns over very long periods.

How Taxes Shape the Final Outcome

The true comparison begins once you include taxes and withdrawal rules.

Mutual Funds:

Equity funds are taxed at 15% on gains if held for under a year and at 10% on long-term gains (beyond ₹1 lakh a year).
Withdrawals are fully flexible. It helps when you need money for goals at different times now. You can redeem whenever you want, and there is no mandatory annuity or age limit.

NPS:

Contributions can get deductions under Section 80C and an extra ₹50,000 under 80CCD(1B), but only under the old tax regime. Under the new regime, these deductions do not apply, except for employer contributions.
At retirement, 60% of the corpus can be withdrawn tax-free. The remaining 40% must be used to buy an annuity, and the annuity income is fully taxable as per your tax slab.
NPS generally has lower fund management costs, but that saving may be offset by limited flexibility at exit.

So, while NPS may give better tax breaks at the start, mutual funds often give you more control at the exit, which can have a big effect on post-tax returns.

What Changed in 2025—Why the Comparison Matters Now

Several tax and regulatory updates have changed the equation:

New tax regime dominance: Many taxpayers have moved to the new regime, which removes most 80C deductions. This reduces NPS’s tax advantage for contributions made by individuals themselves.
Employer contribution limit increased: Employers can now put in up to 14% of basic salary to NPS under Section 80CCD(2). This stays tax-deductible even under the new regime, so NPS is more attractive for salaried workers who get this benefit.
Withdrawal flexibility improved: The Systematic Lump Sum Withdrawal (SLW) option now lets the 60% lump sum be taken out in instalments until age 75.
Reform proposals: There are proposals to lower the mandatory annuity share from 40% to 20%, which would make NPS much better after tax if this goes through.

Together, these changes mean the NPS vs mutual fund decision now rests more on your tax regime and employment structure and profile than it did a few years ago.

Two Realistic Scenarios

1. Ramesh, 30, salaried employee, new tax regime

Invests ₹10,000 per month for 25 years.
His employer puts in 10% of his basic salary to NPS.
He chooses an aggressive NPS plan with 75% equity.

By retirement, he gets the advantage of tax-free employer contributions and lower fund costs. But he must use 40% of his corpus to buy an annuity, and that annuity income will be taxed when he gets it. Assuming 12% annual growth, his effective post-tax return could be about 10–11%, depending on annuity rates.

2. Meera, 35, self-employed, old tax regime

Invests ₹10,000 per month in equity mutual funds for 25 years.
She uses 80C + 80CCD(1B) deductions via NPS in the early years but later moves her focus to mutual funds.

With steady investing and long-term capital gains taxed at 10% over ₹1 lakh a year, her effective post-tax return may be around 12–13%, provided she stays invested and times redemptions sensibly.

NPS or Mutual Funds: What Should Guide Your Choice

Choosing between NPS and mutual funds is not only about raw returns. Your goals, tax situation, and need for flexibility should be considered.

Investment horizon: Both suit long-term plans, but mutual funds offer more flexibility if your plans change.
Tax slab and regime: NPS looks better for those on the old regime or with large employer contributions.
Liquidity needs: Mutual funds are easier to access in an emergency.
Risk appetite: Mutual funds may swing more but can also give higher returns. NPS mixes equity and debt, so growth is steadier.
Future reforms: If annuity rules are relaxed, NPS could become much more competitive.

Which Will Make You Richer in 2025? Find Out Now

In 2025, mutual funds will still have an advantage for many investors who want long-term wealth, mainly because they allow more equity, let you withdraw easily, and have better capital gains tax rules.

But NPS is more attractive for salaried people under the new tax regime, due to higher employer contribution limits and relaxed withdrawal options. It can be a useful add-on for retirement, especially if you prefer regular savings with lower costs.

In the end, the right choice depends on your tax slab, job setup, and cash needs. Many investors now use both: NPS for steady, disciplined retirement savings and mutual funds for growth and flexibility.

You can start investing by opening an account through Zerodha.