Planning for retirement? Well, you are in luck because, in this article, we are diving into the exciting world of NPS vs SIP. The National Pension Scheme (NPS) and Systematic Investment Plan (SIP) are two popular contenders that can offer you unique benefits. If you are curious about which path to take, read this piece. We are going to unravel the riddles of both options that may help you make an informed decision for a secure and fulfilling retirement.
What is the National Pension Scheme?
Regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA), NPS is a defined-contribution pension scheme. Private, public, and unorganised sector employees can use NPS to save and invest for their retirement.
NPS is a government-backed scheme that allows you to invest in a diversified portfolio of equity, government and corporate bonds and alternative assets. You can contribute to the plan in your working years. At the age of 60, the scheme matures, and you can withdraw up to 60% of the corpus in a lump sum if the total amount is more than Rs 5 lakh. You can also withdraw 100% of the corpus if it is up to Rs 5 lakh. In the case of the former, the remaining 40% must be used to purchase an annuity from a PFRDA-empanelled life insurance company.
Let’s move on to the features of NPS.
Features of NPS
- NPS offers two accounts - Tier I and Tier II. Tier I is a mandatory account with restrictions on withdrawals. It is primarily used for retirement planning. Tier II is a voluntary account that offers more flexibility in terms of withdrawals. It can be used as a savings account.
- NPS matures when you turn 60. However, you can continue contributing to your NPS beyond the age of 60 years up to 75 years.
- NPS offers partial withdrawals for certain specified purposes if you have been a subscriber for at least three years. You can withdraw up to 25% of your contributions for a maximum of three times during the entire tenure.
Systematic Investment Plan
A Systematic Investment Plan (SIP) is not a type but a method of investing in a mutual fund scheme. Mutual funds are investment instruments that take money from multiple investors and invest it in other securities to earn profits. An SIP allows you to invest a sum of money at a chosen frequency in mutual funds of your choice. For instance, you can start an SIP of Rs 7,000 per month in Fund X for a period of 10 years. You can use an SIP to invest in different types of funds, like equity, debt, or hybrid funds.
It is time to go through some features of SIPs.
Features of Systematic Investment Plan
- SIPs leverage the concept of rupee cost averaging. This means that when you invest through an SIP, you get more units when prices fall and fewer units when prices soar. Since market prices are constantly fluctuating, SIPs can help you balance out the costs resulting in a lower average purchase cost over time.
- SIPs allow you to capitalise on the power of compounding. The returns generated on your initial investment are reinvested in the market to earn additional returns. Over time, this compounding effect helps you build wealth and achieve your financial goals sooner.
- SIPs provide you with a plethora of options to choose from. You can invest monthly, quarterly, annually, etc. Moreover, there are different types of SIPs to make your investment journey more convenient.
NPS vs SIP – How is each option taxed?
NPS: You can claim tax deductions on NPS contributions up to Rs 2 lakh per annum. Moreover, NPS offers a tax-free corpus of up to 60%. The remaining 40% is taxable per the tax slab you fall into for the year.
Mutual funds: Mutual funds are taxed according to their type and holding period. Here’s how this works:
- Equity funds
Equity Linked Savings Scheme is the only mutual fund that allows you to reduce your taxable income by up to Rs 1.5 lakh per annum.
All equity investments held for more than one year qualify for Long-Term Capital Gains (LTCG) tax. Gains exceeding Rs 1 lakh per year are taxed at 10%. Investments held for less than one year qualify for Short-Term Capital Gains (STCG) tax levied on profits at 15%.
- Debt funds
All gains from debt funds with 35% or less of their assets in equities are added to your taxable income and taxed according to your income tax slab. Gains from debt funds with more than 35% but less than 65% equity allocation are considered LTCG and are taxed at 20% with indexation benefits.
- Hybrid funds
Equity-oriented hybrid funds are taxed as equity funds, and debt-oriented hybrid funds are taxed as debt funds.
Conclusion
NPS and SIP can both help you while saving for retirement. However, while NPS has a lock-in period till age 60 and restrictions on partial withdrawals, SIPs offer more flexibility. It is wise to assess what you need and prefer and then choose an option.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
