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There is no single winner among NPS, mutual funds and ULIPs. NPS gives the cheapest structure and an upfront tax break but locks most of your money until retirement. Equity mutual funds give the most flexibility and clean taxation. ULIPs mix insurance and investing, and they make sense only in narrow cases.
Reports this week quoted the PFRDA chairman saying NPS has beaten mutual funds on long-term returns. Separately, SEBI has reportedly proposed tax relief on mutual fund switches. Both items push people to compare these three products, so here is a plain comparison of lock-in, tax and a worked example.
Key takeaways
- NPS is built for retirement: most of the money is locked until age 60, and at least part of it must be converted into a taxable annuity.
- Equity mutual funds are the most flexible. Long-term gains above ₹1.25 lakh a year are taxed at 12.5%, and you can exit whenever you like.
- A ULIP's maturity can be tax-free, but only within premium limits, and its charges usually reduce returns compared with a plain index or equity fund.
- A return claim for one product over one period tells you little. Asset mix, costs, tax and your own discipline decide your outcome.
What did the PFRDA chairman claim, and how should you read it?
According to the NDTV Profit report, the PFRDA chairman said NPS has done better than mutual funds over the long term, and he also sought banks' support to expand the scheme. We do not have the underlying data from that report, so we will not repeat any numbers from it.
It is worth reading such statements carefully. The result depends on which NPS scheme (equity, corporate bond, government securities) is compared with which category of mutual fund, and over which years. NPS also holds a mix of assets and is run with very low costs, so a like-for-like comparison is harder than a headline suggests. Past returns are not a promise of future returns for either product.
NPS vs mutual funds vs ULIP: side-by-side table
The table reflects rules as commonly understood for FY 2025-26. Rules can change, and the Income Tax Act 2025 renumbers sections from April 2026, so check the current provisions on the Income Tax Department site before acting.
| Feature | NPS (Tier I) | Equity mutual funds | ULIP |
|---|---|---|---|
| Lock-in | Until age 60 for most of the corpus; limited partial withdrawals allowed after 3 years for specified needs | None for regular funds (3 years for ELSS) | 5 years minimum |
| Tax benefit when you invest | Extra deduction of up to ₹50,000 under the old regime; employer contribution deduction also available under the new regime | None, except ELSS under the old regime | Premium deduction under the old regime, within limits |
| Tax on exit | Up to 60% lump sum tax-free; the annuity part is taxed as income when you receive it | Gains held over 12 months: 12.5% above ₹1.25 lakh a year; shorter holding: 20% | Usually tax-free if yearly premium is within ₹2.5 lakh; above that, gains are taxed like equity funds |
| Costs | Very low fund charges (capped well under 0.1% for fund managers), plus account charges | Direct plans are cheapest; regular plans cost more | Several layers: allocation, fund management, mortality and admin charges |
| Returns | Market-linked, depends on equity share (up to 75%) | Market-linked, depends on fund | Market-linked, minus insurance and other charges |
| Flexibility | Low | High | Medium to low |
How is each one taxed in detail?
NPS
At 60 you can take up to 60% of the corpus as a lump sum, which is tax-free. At least 40% must buy an annuity, and the pension that annuity pays is added to your income and taxed at your slab rate. PFRDA has reportedly eased the rule for non-government subscribers, allowing a larger lump sum (up to 80%, with 20% going to annuity), so confirm the current exit rules on the PFRDA website.
Switching between NPS asset classes or fund managers does not trigger tax. That is a real advantage over mutual funds, where every switch counts as a sale. Contributions earn a deduction only if you use the provision, and under the old regime the extra ₹50,000 under Section 80CCD(1B) sits on top of the ₹1.5 lakh Section 80C limit.
Mutual funds
Equity-oriented funds (at least 65% in equities) are taxed at 12.5% on long-term gains above ₹1.25 lakh in a financial year, and 20% on short-term gains. Debt funds bought after April 2023 are taxed at your slab rate regardless of holding period. Dividends are taxed at slab rate as well.
On the SEBI proposal, reports say it seeks tax relief on switches. We do not have the full details, so treat it as a proposal until it becomes law. For switching from regular to direct plans today, see our step-by-step guide on switching to direct plans.
ULIP
For policies issued from 1 February 2021, maturity proceeds stay tax-free under Section 10(10D) only if the total annual premium across your ULIPs is ₹2.5 lakh or less. Above that, the gains are treated as capital gains, taxed like equity funds. The death benefit is generally tax-free if the sum assured meets the minimum, typically 10 times the annual premium. Check this with the insurer, because the condition is easy to miss.
Worked example: ₹1.2 lakh a year for 20 years
Take Meera, aged 30, who invests ₹1.2 lakh a year (₹10,000 a month, simplified to one payment at each year-end) for 20 years. She puts in ₹24 lakh in total. We assume 10% a year, after fund costs, for NPS and the mutual fund, and 9% for the ULIP because of its extra charges. These are illustrative assumptions, not forecasts.
Mutual fund. Future value = 1,20,000 × ((1.1020 − 1) ÷ 0.10) = 1,20,000 × 57.275 = about ₹68.73 lakh. Gain = 68.73 − 24 = ₹44.73 lakh. Taxable gain after the ₹1.25 lakh exemption = ₹43.48 lakh. Tax at 12.5% = ₹5.44 lakh, or about ₹5.65 lakh with 4% cess. Cash in hand is roughly ₹63.1 lakh if she sells everything in one year. Spreading sales over several years can use the ₹1.25 lakh exemption more than once.
NPS. The corpus is the same ₹68.73 lakh at the same assumed return. At 60, 60% is a tax-free lump sum of ₹41.24 lakh. The remaining 40%, ₹27.49 lakh, buys an annuity. At an assumed annuity rate of 6% (actual rates vary by provider and over time), that gives about ₹1.65 lakh a year, taxable at her slab. On top of that, if she is in the old regime and in the 30% bracket, the extra ₹50,000 deduction saves about ₹15,600 a year including cess, or ₹3.12 lakh over 20 years.
ULIP. At 9%: 1,20,000 × ((1.0920 − 1) ÷ 0.09) = 1,20,000 × 51.16 = about ₹61.39 lakh, tax-free because the yearly premium is under ₹2.5 lakh. That figure includes the cost of life cover.
| Product | Money at 50 (year 20) | After tax at exit | What you can use freely |
|---|---|---|---|
| Equity mutual fund | ₹68.73 lakh | about ₹63.1 lakh | All of it |
| NPS | ₹68.73 lakh | ₹41.24 lakh lump sum, plus a taxable annuity from ₹27.49 lakh | 60% in cash, and only at 60 |
| ULIP | ₹61.39 lakh | ₹61.39 lakh | All of it, after 5 years |
The pattern matters more than the exact figures. At equal returns the mutual fund leaves you with more usable cash and the ULIP lands close behind. NPS looks smaller on paper but gives the tax deduction and a pension that lasts as long as you live.
Is NPS better than mutual funds?
For retirement-only money, it can be, mainly because of low costs, the upfront deduction and forced discipline. If you are in the new tax regime, the deduction benefit shrinks to the employer contribution route, which is a smaller edge.
For goals before 60, such as a house, a child's education or a career break, NPS is the wrong tool. And its equity limit of 75% means that, in a strong equity market, a pure equity fund can do better. Reports of NPS returns in 2026 will depend on which scheme and which time window they use, so compare against the right category before you decide. For wider context on safer options, see our post-tax comparison of FD, mutual funds and gold.
ULIP vs mutual fund: which is better?
For most people, a term plan plus a low-cost mutual fund beats a ULIP, because you pay only for the cover you need and keep the investment charges low. The ULIP's tax-free maturity is attractive, but the mutual fund's 12.5% on gains above ₹1.25 lakh is not a heavy price, as the example shows.
A ULIP can make sense if you already hold a large amount of insurance, want a forced five-year-plus discipline, and have read the charge structure line by line. Newer ULIPs usually have lower charges than older ones, but the fund management charge, mortality charge and policy admin charge all still apply.
Common mistakes people make
- Comparing returns without tax and cost. A 10% gross return and a 10% net-of-everything return are different things.
- Locking too much into NPS. If you may need the money before 60, keep most of it in flexible assets.
- Forgetting the annuity. Many people read "60% tax-free" and ignore that the pension from the other 40% is taxable.
- Buying a ULIP for the tax break alone. Check the charges and the sum assured condition first.
- Selling all mutual fund units in one year. That wastes the yearly ₹1.25 lakh exemption you could use over several years.
Quick checklist before you choose
- Write down the goal and the year you need the money.
- If it is after 60 and for income, consider NPS for part of it.
- If it is before 60 or uncertain, use mutual funds.
- Check which tax regime you are in, since NPS deductions work differently in each.
- If a ULIP is offered, ask for the charge table and the sum assured in writing.
- Confirm the rules with a chartered accountant, because exit and tax rules do change.
If you are also weighing small-savings options for part of the money, our PPF, Sukanya Samriddhi and NSC comparison covers those.
FAQ
Is NPS better than mutual funds for retirement?
It can be for the retirement slice of your savings, thanks to low costs and tax benefits. It is less suitable as your only investment because of the lock-in and the compulsory annuity. A mix often serves better than either alone.
How is NPS taxed compared with a ULIP?
NPS gives a tax-free lump sum of up to 60% at exit, while the annuity income is taxable. A ULIP's maturity is typically tax-free if yearly premiums stay within ₹2.5 lakh, and taxable as capital gains above that.
What are NPS returns in 2026?
NPS returns are market-linked and no one can fix them in advance. They vary by scheme and by your equity share. Check the latest scheme-wise returns on PFRDA or your fund manager's factsheet and look at 5-year and 10-year figures rather than a single year.
Can I withdraw from NPS before 60?
Partially, yes. After three years you can usually withdraw up to 25% of your own contributions for specified reasons such as illness or a home purchase, with a limit on how many times. Full exit before 60 comes with a mandatory annuity share that is higher than at normal retirement.
Should I switch from a ULIP to mutual funds?
Not automatically. Surrendering early can mean heavy charges and loss of cover. Look at how long you have held it, what the surrender value is, and talk to a fee-only advisor or chartered accountant before deciding.
Bottom line
For most salaried people, a sensible split is NPS for the retirement core if the lock-in suits you, equity mutual funds for goals and flexibility, and a ULIP only if you have checked the charges and the tax conditions. Start by listing your goals and dates, then run your own numbers using the example above. Confirm the latest rules before you commit.
