The common features of the instruments available for retirement savings are that such instruments are of long-term nature and they are tax efficient.
There are several investment options available through which retirement corpus may be accumulated to enjoy regular pension / annuity income after leaving the job or other profession. The common features of the instruments available for retirement savings are that such instruments are of long-term nature and they are tax efficient.
Out of the various options available, features of National Pension System (NPS), Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are discussed here, which would help you in selecting one of the options or a combination of more than one options according to your financial needs, available resources and risk appetite.
National Pension System (NPS)
Introduced in 2004 to provide pension to government employees who joined their services after December 31, 2003, NPS was later made available for the general public from 2009.
Gradually, NPS has been made tax efficient – by introducing tax deductions up to Rs 50,000 u/s 80CCD(1B) on contributions made to Tier 1 NPS account in a financial year and making lump sum withdrawal up to 60 per cent of retirement corpus at the time of retirement at the age of 60 years – to make it popular.
NPS is a low-cost instrument, where multiple investment options are available related to equity, company bonds and government securities, which investors may choose depending on their risk appetites. Investors also have options to choose a fund manager and an annuity service provider.
Depending on choice of investment avenues, it is expected that the annualised return or compound annualised growth rate (CAGR) on NPS would vary from 8 per cent to 12 per cent.
The investments have varied market risks depending on investment options and normally the investment period is up to the age of retirement.
Equity Linked Savings Scheme (ELSS)
ELSS is a kind of equity mutual fund (MF), which is popular tax-saving instrument. As ELSS funds predominantly invest in equity, such investments are subject to market risks.
Although ELSS investments have lock-in period of only 3 years, but to minimise risks and maximise the equity returns, you should stay invested for a long period. Also, to accumulate retirement corpus through ELSS, you need to stay invested till the retirement age nears.
ELSS investments are eligible for tax deductions u/s 80C, but 10 per cent long-term capital gain (LTCG) tax is charged on LTCG exceeding Rs 1 lakh in a financial year.
The best way to invest in ELSS is through systematic investment plan (SIP), and through long-term investments, you may expect a CAGR of 12-15 per cent.
Public Provident Fund (PPF)
PPF is one of the most popular tax-saving investment options due to Sovereign guarantee and attractive interest rate offered. It is the safest tax-saving investment and risk-averse investors prefer it the most.
There is no market risk involved in PPF and amount invested is eligible for tax deductions u/s 80C as well as interest earned and maturity amounts are also tax free.
The initial investment period in PPF is 15 years, which may be increased after maturity any number of times for a block of 5 years.
Currently, the maximum cap on PPF investment is Rs 1.5 lakh in a financial year and the rate of interest is decided by the government on a quarterly basis, which is currently 7.9 per cent.