Tip clearance between the blade tip and casing of a centrifugal compressor can be varied through two methods: by changing the blade height (M1) or by changing the casing diameter (M2). Numerical simulations are carried out to compare these two methods and their effect on the stage and impeller performance. The impeller and diffuser are connected through rotor Stator boundary using frozen rotor approach. Overall stage performance and the flow configuration have been investigated for nine tip clearance levels from no gap to 1 mm. Impeller and diffuser performances are also presented separately. It has been found that the overall and impeller performance are comparatively better for Ml below tip clearance of 0.5 mm whereas M2 is found advantageous above 0.5 mm of tip clearance. Both M1 and M2 show performance degradation with the increase in tip clearance. Two models have been proposed for the stage total pressure ratio and efficiency, which are found to be in agreement with experimental results. The impeller efficiency and the pressure ratio are found to be maximum at tip clearance of 0.1 mm for both the cases however minimum diffuser effectiveness is also observed at the same clearance level. Diffuser effectiveness is found to be maximum at zero gap for both cases. As it is practically impossible to have zero gap for unshrouded impellers so it is concluded that the Optimum thickness is 0.5 mm onwards for Ml and 0.5 mm for M2 in terms of diffuser effectiveness. Mass averaged flow parameters, entropy, blade loading diagram and relative pressure fields are presented, showing the loss production within the impeller passage with tip clearance.