The National Pension Plan and the Systematic Investment Plan (SIP) are two methods widely preferred by individuals for building a body of retirement funds. While the NPS is a social security initiative introduced by the central government, the SIP allows individuals to invest a small, fixed amount of money at regular intervals in mutual funds.
Investors should weigh retirement goals, risk appetite, age and investment horizon while considering both options, said Saurav Basu, head of wealth management at Tata Capital in an interaction exclusive with CNBC-TV18.
âThe NPS aims to allow the investor to earn an annual income after retirement age and is designed so that it is not easy to opt out before retirement. SIPs, on the other hand, are flexible and the investor can choose to invest only in stocks or choose a combination of stocks and debt. The investor can choose to take the desired exposure over a long period of time and achieve the objectives set. “
Regarding the risks, Basu said that NPS has limited risk because it only has 50% exposure to equities, which decreases further by 2% once the investor is 50 years old. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is secure.
From a tax point of view, Basu explained that the NPS is exempt from tax up to 60% of the amount of the corpus.
âThe remaining 40 percent, which must be reinvested in the annuity, is taxable according to the applicable tax bracket of the investor. NPS and SIP for ELSS enjoy tax advantages up to 80C. The gross income of NPS is tax exempt up to Rs 1.5 lakh u / s 80CCE. In addition, one can benefit from a tax exemption of up to Rs 50,000 on the amount of the investment NPS u / s 80CCD. The same goes for ELSS funds which are also exempt up to Rs 1.5 lakh per year u / s 80C, “he said.
So, considering both sides of the coin, Basu suggested that investors should prioritize the timing of returns as well as their financial goals.
They can also use financial advisers to choose the best investment for them.
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(Edited by : Ajay Vaishnav)