NPS versus MFs - Mint - Feb 2024
The choice between National Pension System (NPS) and equity mutual funds depends on various factors, including your financial goals, risk tolerance, investment horizon, investment preferences and tax benefits. Both NPS and equity mutual funds have their own advantages and disadvantages.
| National Pension System (Tier1) | Equity Mutual Funds | |
|---|---|---|
| Purpose | NPS is a long-term retirement-focused investment vehicle designed to provide a regular income stream after retirement. | Mutual funds serve various financial goals, including wealth creation, retirement and tax planning depending on the objective of the scheme selected.Options are available for short to long-term investment horizons. |
| Investment Options: | NPS Tier 1 offers a mix of asset classes, including equity, corporate bonds, and government securities and alternative investment funds. Investors can choose between different investment options: Active Choice (allows self-allocation) or Auto Choice (allocation based on age). Equity investment is only into the top 200 stocks of the equity capital market sorted by market capitalisation. | Equity Mutual funds cover a broad range of asset classes, including equity, equity arbitrage and debt instruments (hybrid equity funds). Investors can choose funds based on their risk tolerance, investment horizon, and financial goals. Equity mutual funds must invest atleast 65% of its assets into equity and equivalent securities. These funds could be passively or actively managed and could have allocations across sectors / themes, market capitalisation, etc. |
| Tax treatment | Exempt – Exempt – Exempt (EEE). Tax exemption upon investment, tax exemption on capital appreciation and tax exemption on 60% of the pension corpus and for buying the annuity product with minimum 40% of the NPS corpus. | Only Equity Linked Savings Scheme (ELSS) Mutual Funds can benefit from tax exemption |
| Tax Benefits | Depending on the tax regime of the subscriber, the subscriber of NPS Tier 1 can avail of tax exemption of up to Rs 1.5 lakhs under Section 80 CCD (1) of the Income Tax Act. A further deduction of up to Rs. 50,000 under Section 80 CCD (1B) of the Income Tax Act exclusively for NPS investments. Further, subscribers under Corporate NPS model can get additional tax benefits under section 80CCD (2) of the Income Tax Act on investment up to 14% of basic Salary. This benefit is capped at Rs 7.5 lakhs (including PF, Superannuation fund and NPS). Only sec 80CCD (2) benefit is available under the new tax regime. Whereas all the other 3 exemptions as mentioned earlier are available under the old tax regime. | ELSS mutual funds can get benefit of up to Rs 1.5 lakhs under Section 80 CCD (1) of the Income Tax Act.Short term capital gains on equity MFs – 15%; Long term capital gains on equity MF – 10% |
| Lock-in Period: | NPS Tier 1 investment has a lock-in period until retirement (with some pre-conditions for partial withdrawals). | Except for ELSS Mutual funds which have lock-in of 3 years or some other schemes which have a lock in as defined in their scheme information document, most equity mutual funds most mutual funds do not have a lock in period |
| Regulation | Regulated by the Pension Fund Regulatory and Development Authority (PFRDA) | Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) |
| Expense Ratios | One of the lowest in the world | Differs across mutual fund schemes. Investors should refer to scheme related documents / respective mutual funds website |
| Asset class shift | Upto 4 times shift between equity, corporate bonds, Gsecs and Alternate Assets every year without tax incidence. | Shift across asset Mutual Funds is taxable. |
| Change of fund manager | Pension Fund Manager change can be done once every financial year without tax incidence. | Any change between Mutual Fund is taxable. |
| Exit | 40% of the NPS Tier 1 Corpus has to be utilised to purchase an annuity from an annuity service provider. The remaining 60% can be withdrawn post attaining the age of 60 without any tax incidence | No lock-in period other than mentioned above. However, mutual funds may have an exit load, |
It is advisable to consult with a financial advisor who can assess your individual circumstances and provide personalized advice based on your goals and risk profile.
The best time to start NPS is the day you decide you want one.
The sooner you start, the more compounding gains you make! Isn't that wonderful?
