Planning for post-retirement days is one of the key parts of financial roadmap for people, as one doesn’t work for their whole life and has to live on savings or investments made during their earning days to meet expenses post-retirement.
As people grow older, their concern about financial stability and security grows. Individuals want to maintain the same lifestyle they are accustomed to during their working days even after they cease active employment. By planning for retirement, individuals can mitigate the risk of outliving their savings and facing financial strain later.
In this context, it becomes important to consider how and where you invest your money for retirement planning. The National Pension System (NPS) and mutual funds are two popular ways to invest your money for your golden years.
Both NPS and mutual funds (equity-linked savings schemes) have their unique benefits and tax advantages. In this article, we will discuss about NPS and ELSS and how the two schemes are tailored for retirement planning.
NPS, Mutual Funds should match investor’s financial objectives
Ultimately, the choice between NPS and Mutual Funds should match your specific financial objectives. NPS appeals to those prioritizing financial security and tax benefits, while Mutual Funds are favored by individuals with higher risk tolerance, medium to long-term goals, and diverse investment needs.
Shrinivas Khanolkar, Head – Products, Marketing & Corporate Communication, Mirae Asset Investment Managers, helps us understand each of the investment vehicles in a bit detail.
With NPS, a government-backed retirement savings scheme, one invests a fixed amount each month until investment goals or retirement age is reached; and upon retirement, a portion of the corpus can be withdrawn, while the rest remains under the management of a PFRDA-registered pension fund manager, he explains.
NPS Vs Mutual Funds: Tax benefits
NPS accounts offer tax benefits in accordance with Sections 80C and 80CCD of the Income Tax Act, says Khanolkar.
Talking about ELSS tax benefits, he says, this mutual fund category is also eligible for tax deduction under Section 80C, and a deduction of up to Rs 1.5 lakh for investment is allowed, resulting in saving tax up to Rs 46,800. “It comes with a lock-in period of 3 years meaning it cannot be redeemed before 3 years. Upon redemption of ELSS fund is subject to long-term capital gains tax at 10%. But, if the gain is within the limit of Rs 1 lakh, then there is no tax.”
NPS is more of a retirement solution with partial exposure to equity and the invested amount is locked till the age of 60 years. With an ELSS fund, you have the shortest lock-in period of only three years.
For a new investor, ELSS is an ideal choice, since, in addition to tax benefits, they get a flavour of equity investing and mutual funds.
“Retirement planning is an indispensable aspect of managing personal finances, and with the myriad of investment options available today, it’s easy to feel overwhelmed. When weighing the pros and cons of NPS and mutual funds, one is essentially navigating a spectrum of financial opportunities to grow wealth smartly,” he says.
The choice between the two hinges largely on your specific financial objectives and risk appetite. However, there is no one-size-fits-all answer to the NPS vs Mutual Funds dilemma. Investment decision should align with a person’s financial goals, risk appetite, and vision for securing a financially sound retirement.
So, the right question to ask would be ‘Which is better for me?’, Khanolkar concludes.