The National Pension Scheme and Systematic Investment Plan (SIP) are two widely preferred modes among individuals for building a corpus of retirement funds. While NPS is a social security initiative introduced by the central government, SIP allows individuals to invest a small and fixed amount of money at regular intervals in mutual funds.
Both NPS and SIP serve different investor needs and investors must know which one to choose and when. Basically, both NPS and SIP are long-term investments.
Investors should evaluate retirement goals, risk appetite, age and investment horizon while considering both options, said Saurav Basu, Head — Wealth Management at Tata Capital in an exclusive interaction with CNBC-TV18.
“NPS aims to enable the investor to earn an annual income after his/her’s retirement age and is designed such that one cannot easily withdraw before retirement. SIPs, on the other hand, are flexible and the investor can choose to invest only in equities or choose a mix of equities and debt. The investor can choose to take the desired exposure over a long period of time and achieve the set goals."
On risks, Basu said that NPS has limited risk as it has only 50 percent exposure to equities which further reduces by 2 percent after the investor turns 50. It is governed by the Pension Fund Regulatory and Development Authority (PFRDA) and is secured.
On mutual funds, Basu said that Sebi formulates policies, regulates and supervises these to protect the interest of the investors. However, one cannot deny that mutual funds are always subject to market risks.
From a tax perspective, Basu explained that NPS is tax-free to the extent of 60 percent of the corpus amount.
"The rest 40 percent, which is to be reinvested in the annuity, is taxable as per the applicable tax bracket of the investor. NPS and SIP for ELSS receive tax benefits u/s 80C. Gross income from NPS is exempted from tax up to Rs 1.5 lakh u/s 80CCE. Also, one can receive a tax exemption of up to Rs 50,000 on the NPS investment amount u/s 80CCD. The same applies to ELSS funds which are also exempted up to Rs 1.5 lakh in a year u/s 80C," he said.
So, considering both sides of the coin, Basu suggested that investors need to prioritise the time frame of returns as well as their financial goals.
They can also take the help of financial advisors to pick the best investment that suits them.
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(Edited by : Ajay Vaishnav)