With government relaxing the rules on taxes on NPS the question of investing in new NPS or mutual funds for retirement has come up yet again.
New changes to the NPS scheme
The cabinet approved a proposal to make NPS tax-free on withdrawal. A full tax exemption on 60% of the corpus is allowed to withdraw on maturity. This change in rules will be applicable to both government and private employees. The rules will be applicable from the next financial year. Currently at the age of 60 one is allowed to withdraw 60% of the corpus while 40% has to be invested in annuity plans. Out of the 60% withdrawn, 40% is non-taxable and 20% is taxable.
The government contribution towards NPS for central government employees has been increased from 10% to 14% and the employee’s contribution is unchanged at 10%.
The contribution by government employees under Tier II type of NPS is tax-free up to Rs 1,50,000 under section 80C provided there is a lock-in of 3 years. This benefit is only for government employees and it is expected to be extended to private employees as well.
Should you invest in New NPS?
Now with the new changes made to NPS should you or should you not invest in NPS? Here are a few things to consider before a decision can be taken.
The new NPS is not fully EEE. Only 60% of the corpus is exempt from tax. The rest 40% must be still used to buy an annuity. Investment in NPS has to be done till you turn 60. One can only withdraw 20% of it prior to the age of 60. The remaining 80% has to be used to buy an annuity in this case. Annuity income is taxed according to the tax slab.
NPS doesn’t give you the freedom to choose any fund manager of your choice. One has to choose from within the pool of available fund managers. You cannot choose what to do with the maturity amount. You will have to choose annuity. It’s a compulsion.
It is entirely a different story with mutual funds. Tax saving mutual funds gains are taxable at 10%. The gains up to Rs 1 lakh are exempt from taxes. There is no compulsion on withdrawing money after the lock-in period of 3 years. One is free to choose from a wide variety of fund managers available. What to do with the retirement amount lies in the hand of the investor. There is no such compulsion like the NPS to buy an annuity.
ELSS vs New NPS
Here’s a table comparing ELSS and NPS.
|Lock in Period||Has a lock-in period up to retirement, which is still the age of 60.||Has a 3-year lock-in period.|
|Tax benefits||Qualifies for a tax saving of Rs 1,50,000 per annum under 80C and additional Rs 50,000 under 80CCD(1B).||Qualifies for a tax saving of Rs 50,000 per annum under 80C.|
|Minimum Investment||Rs 500 is the initial contribution and need to invest a minimum of Rs 6,000 per annum.||The minimum investment is Rs 500 which can be invested a lump sum or SIP.|
|Asset Allocation||The money invested is split into equity and bonds. With 50% going to equity and the rest to government bonds.||Money is invested entirely in equity in a diversified manner and is actively managed.|
|Premature withdrawal||The invested amount can be withdrawn prematurely with a certain condition.||The money cannot be prematurely withdrawn before the lock-in period of 3 years expires.|
|Taxes||Maturity amount is partially taxable. 60% of the corpus is tax-free. The rest 40% which is used to buy an annuity is taxable according to the tax slab.||There is an LTCG tax of 10% on gains above Rs 1,00,000.|
Therefore, choose wisely and make the most of your savings and investments. Investing in mutual funds gives more freedom to investors with less lock-in period. Even with no premature withdrawal, ELSS is more flexible and liquid investment category than NPS. ELSS allows the money invested to earn its full potential as these funds are entirely equity-based funds which are actively managed. Whereas in NPS the equity allocation is just 50%. Hence returns earned on ELSS funds are higher than NPS.