NPS vs Mutual Funds for NRI Retirement
Neha Navaneeth
Marketing & Content Associate
Nov 28, 2025
NRIs are allowed to invest in NPS or mutual funds to plan for retirement. The National Pension System (NPS) is a government-backed program, and the Mutual Funds are market-oriented. Though the two options are helpful for retirement planning, they differ in a number of ways. Therefore, the right perspective of nps vs Mutual funds as an NRI retirement is necessary in matching your selection with future goals.
Understanding NPS: How It Works for NRIs
National Pension Scheme (NPS) is a long-term retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Its goal is to give a structured way for NRIs to build their retirement corpus through systematic savings in their working years.
NPS for NRI retirement investment can be done using a Tier I account. It is a mandatory retirement account with strict withdrawal limitations and tax benefits. Contributions made in this account are locked till the age of 60. However, NRIs can’t open a Tier II account.
NRIs can easily open their NPS account through their NRE or NRO bank account. But funds repatriation is allowed only from the NRE account, and contributions made through the NRO account are non-repatriable. As per the 2025 update, the equity allocation in NPS for non-government subscribers has increased to 100%. It allows the NRI to make aggressive growth-oriented investments for long-term horizons at a higher risk.
Understanding Mutual Funds for NRIs
Mutual funds are the pooled investment vehicles managed by fund managers. The money of NRI investors is allocated across equities, debt instruments or a mix of both, on the basis of scheme goals. The common types of mutual funds available for NRIs are mentioned below.
Equity funds: Equity funds have high growth potential but greater risk.
Debt funds: It specialises in fixed income assets, and it is less risky and more stable.
Hybrid funds: It is a mixture of debt and equity with balanced returns.
NRI investments are governed by the Foreign Exchange Management Act (FEMA). NRIs can invest using an NRE or an NRO account. Investments made through NRE are repatriable, while investments using an NRO account are non-repatriable.
Mutual funds are highly liquid, and there is no obligatory lock-in. However, other scheme-specific lock-ins may be applicable across the board to all investors.
Key Differences between NPS and Mutual Funds
Both NPS vs mutual fund for retirement involve market-linked investments, but the core differences between both options lie in goals, regulations, investment type, tax, returns, risk levels, etc. Let us look at the differences between nps vs mutual funds for NRI retirement below.
Feature | National Pension Scheme (NPS) | Mutual Funds (MFs) |
Primary Goal | For NRI Retirement Planning | For Wealth creation, Income, Tax Saving, etc., for NRI |
Regulator | PFRDA (Pension Fund Regulatory and Development Authority) | SEBI (Securities and Exchange Board of India) |
Investment Type | Pension Fund | Pooled Investment Vehicle |
Lock-in Period | Tier I: Till age 60 | High liquidity; ELSS has a 3-year lock-in |
Liquidity | Low (Tier I) | Generally High (Open-ended schemes), Low (ELSS) |
Tax on Investment | Up to ₹1.5L (80C) + ₹50K (80CCD(1B)) + Employer (80CCD(2)) | Only ELSS up to ₹1.5L (80C) |
Tax on Maturity | 60% Lump Sum Tax-Free; 40% Annuity (Mandatory, Taxable Income) | Capital Gains Tax (Equity/Debt rules differ) |
Fund Management | Very Low Charges | Higher Expense Ratios (especially active funds) |
Returns Comparison
NRI investors can compare NPS vs mutual fund returns before choosing the right option for their retirement. In 2025, NPS tier 1 equity funds offer the 12–15% annual returns for the best schemes, and long-term averages lie between 8–12%. It also offers a mix of corporate bonds, equity and government securities with historical returns of 8-10% for equity and 6-8% for debt for 10 years.
40% of the NPS corpus can be invested in an annuity at maturity and yield the 5-6% overall returns. On the other hand, equity mutual funds offer historical returns of 10-15% over 10 years, because it is subject to market volatility. Hybrid mutual funds balance debt and equity and offer you 8-12% returns with average risk.
Charges & Costs
NPS is the affordable managed fund option for NRI retirement, with management fees of 0.1%. The additional charges are applicable to the custodian fees and annuity purchase fees. Mutual funds offer higher returns than NPS, but also come with higher volatility and expense ratios of around 1–2.25%.
Here’s how the charges of a mutual fund vs NPS vary:
Feature | National Pension System (NPS) | Mutual Funds |
Fund Management Cost | Low (around 0.1% to 0.15%) | Higher (typically 1% to 2.25%) |
Administrative Costs | Separate administrative and record keeping charges (e.g., CRA charges) | Included in the expense ratio, covering marketing, administration, etc. |
Overall Cost | More affordable for long-term retirement planning | More expensive due to higher expense ratios |
Risk & Flexibility
NPS gives a tax-efficient, structured and low-risk retirement plan to NRIs. Mutual funds give high growth potential and flexibility to NRIs, but with more risks. If you want to enjoy flexibility and high return potential, then mutual funds are the right choice for NRI retirement. NPS is a better choice for NRI retirement to enjoy stability and discipline.
Repatriation & Tax Treatment
Fund movement is made through the NRE or NRO accounts for NRI retirement:
For NPS: Contributions are qualified for deductions under 80CCD when NRIs have taxable income in India. Up to 60% of the NPS corpus can be withdrawn tax-free. But a minimum of 40% must be used to purchase an annuity for regular pension income for an NRI.
For mutual funds: LTCG (funds held for more than 12 months) from equity funds are taxed at 12.5% for gains above ₹1.25 lakh, and STCG (funds held for less than 12 months) are taxed at 20% for disposals on/after 23-Jul-2024 (previously 15%).
For debt funds, gains are always taxed at the slab rate.
If the NRI has to return to India, then they have to update their account to a resident status.
NPS Vs Mutual Fund: Which is Better?
The right choice for you depends on the risk you can afford, the returns you expect, and how much cash flow you need. These tips can help you choose:
Opt for NPS to get tax benefits, low charges, and a secure income for retirement.
Mutual funds are preferred for higher returns and more flexibility for easy access.
An NRI can split investments such that 60%-40% in favour of mutual funds and NPS, respectively, for stability plus growth.
Conclusion
Comparison of NPS vs mutual funds helps NRIs in retirement planning. NPS is a cost-effective and regulated avenue with tax benefits. However, their returns are lower compared to mutual funds. While mutual funds offer higher growth potential and flexibility, it is wise for an NRI investor to consider their risk tolerance level, liquidity needs, and long-term goals while deciding on the best option for retirement.
FAQs
What are the differences between the NPS and mutual funds?
The NPS is a retirement-focused investment with limitations on withdrawals before retirement age. But the mutual funds give you more flexibility and liquidity on withdrawals.
Is NPS suitable for retirement planning?
Yes, the NPS is suitable for NRI retirement planning, with a significant amount of corpus mandated to be used for buying annuity.
How is NPS taxed at maturity?
During maturity, 60% of the NPS corpus is tax-free, and 40% can be invested in an annuity.
Which offers higher returns, NPS or mutual funds?
Mutual funds provide higher returns of 10-15%, but are more volatile than NPS for retirement.
