If you want not only to build a substantial retirement fund, but also qualify you for tax benefits under sections 80CCD(1), 80CCD(2), and 80CCD(1B) of the Income Tax Act investing towards NPS can be a good bet. Under NPS Section 80CCD(2) allows you to seek an exception on 10% of your employer's NPS contribution (basic+DA). The tax-saving window is upon us, and both salaried and non-salaried taxpayers are likely to have begun evaluating tax-saving savings opportunities. As an investor, you can seek out investment strategies that would not only allow you to save tax but also provide tax-free income. As a result, we'll here consider some factors such as the convenience of investment, liquidity, risk and returns and compare how National Pension System (NPS) compares to other tax-saving instruments in the common 80C basket, such as ELSS, PPF, and tax-saving bank FDs.
NPS vs ELSS
Equity-Linked Savings Scheme (ELSS), also known as ELSS, is a tax-saving mutual fund that allows you to save up to Rs 1,50,000 per year under Section 80C. Not only a tax benefit and a lower minimum investment of Rs 500 (either lump sum or SIP) ELSS comes with a short lock-in period of only 3 years. Long-term capital gains (LTCG) of more than Rs 1 lakh is taxed at a rate of 10%. The National Pension System (NPS) is a government-backed scheme in which people contribute during their working years in order to receive a pension after they retire. NPS investments qualify for a tax exemption of Rs 1,50,000 under Section 80C of the Income Tax Act, as well as an additional Rs 50,000 deduction under Section 80CCD (1B). You can withdraw 60% of the NPS corpus tax-free upon maturity, while the remaining 40% (taxable at the current tax rates) is used to purchase annuities. Because ELSS is entirely equity-oriented, it is marginally riskier than NPS. The overall equity allocation in the NPS, on the other side, is limited at 75%. Additionally, NPS enables you to invest in asset classes that are comparatively secure, such as corporate debt and government securities. In the long term, though, equity yields are relatively higher than corporate debt and government securities, those who want a lower tax outgo and to build secure retirement corpus NPS can be a good bet. You can contribute towards ELSS, on the other side, if you want to create a corpus for long-term goals like your children's higher education, marriage, and so on, while also limiting your tax liability.
NPS vs PPF
Both of these investment vehicles are simple to invest in. By filling out the application form or online, you can open a Public Provident Fund (PPF) account at any registered bank or post office. You can (between the age of 18 to 65), on the other hand, acquire a PRAN application form from any of the Point of Presence - Service Providers (POP-SP) or can even register for NPS at eNPS website (https://enps.nsdl.com/eNPS/NationalPensionSystem.html). Along with partial withdrawal options, PPF comes with a lock-in period of 15 years. After five years from the end of the year in which you made the initial subscription, you can withdraw up to 50% of your PPF balance only once per year. You can save up to Rs 1.5 lakh by claiming deductions under section 80C in a financial year by investing in PPF. PPF has EEE status, which ensures that the money invested, the interest gained, and the amount collected back at maturity are all tax-free. However, regular income earned from annuities purchased with 40% of the NPS corpus, on the other hand, is subject to taxation. PPF can be considered by anyone who wants to receive assured tax-free returns in order to fulfill goals such as higher education for children, marriage and so on. Individuals who are more risk-averse tend to invest in PPF because it has assured returns. PPF interest rates are currently at 7.1 per cent. Even partial withdrawal is permitted under the NPS withdrawal guidelines for specific reasons such as children's schooling, marriage, or serious illness. Because the interest rate on PPF has been declining in recent years, there is a possibility that NPS will provide you with more decent market-linked returns compared to PPF. While both are attractive retirement savings alternatives, the only way to build a robust retirement corpus in the long-run is to invest in NPS.
NPS vs Tax Saving Fixed Deposits
The returns on tax-saving bank FDs are guaranteed. The interest rates charged to senior citizens are marginally higher than those offered to those under the age of 60. You can withdraw three times from your NPS account over its term, according to certain provisions, however, you can't close or liquidate a tax-saving bank FD before it reaches maturity, which is usually five years. The interest received on a tax-saving FD is taxable according to the investor's tax bracket, and if the gross interest earned in a financial year exceeds Rs. 40,000, TDS is applicable. For senior citizens, the quota is Rs. 50,000 respectively. A tax-saving FD can be considered by someone trying to reduce his or her tax outgo. That being said, keep in mind that the maximum amount that can be received as a tax deduction is Rs. 1.5 lakh, which is the limit set by section 80C. It is important to note that in order to qualify for the Section 80C tax benefit, you must invest in this scheme for at least 5 years. On 5-year deposits, one can now get up to an interest rate of 7.5%. Anyone with a low-risk appetite and a need to earn guaranteed returns over the long term can consider 5-year tax-saving FDs over NPS.
NPS vs NSC
You can conveniently invest in National Savings Certificate (NSC) at a post office, and it has a 5-year maturity period. The risks associated with NSC are low since it is a fixed-return instrument. Every quarter, the government sets the rate of return. NSCs are open to all Indian residents and HUFs. It's worth noting, though, that NSC taxable interest isn't charged to the investor. It is, though, re-invested, and this amount qualifies for a tax deduction under section 80C. NSC is suitable for investors with a low-risk appetite and a need for guaranteed returns. The NSC has an interest guarantee as well as full capital security. That being said, unlike ELSS and the National Pension System, they are still unable to produce inflation-beating returns. You can invest up to Rs.1.5 lakh in this government-backed tax-saving initiative to receive the benefits of 80C deductions. The current interest rate is 6.8% p.a., with the government revising it every quarter it will be compounded annually and paid out at maturity. If you want to gain tax benefits and get assured returns across the term of 5-years you can consider tax-saving FDs or NSC over NPS.
NPS vs EPF vs VPF
The interest received on employees' PF contributions of more than Rs 2.5 lakh per year is proposed to be taxed in Budget 2021. This comes as a shock to high-earners who had previously taken advantage of the government's tax-cut provisions. With tax-free 8.5 per cent returns and a sovereign guarantee, the EPF has proven to be a very profitable investment strategy. Interest is taxable if the Employees' Provident Fund (EPF) + Voluntary Provident Fund (VPF) contributions surpass more than Rs 2.5 lakh. However, VPF contributions are still a viable choice, as VPF still provides 8.75 per cent by considering the tax bracket of 30%. Although the post-tax rate is not very strong, it is much higher than bank FDs, debt funds, NCDs and so on. Even though interest received on contributions above Rs 2.5 lakh will now be taxable, EPF+VPF returns are enticing considering the current rate cut scenario. That being said, EPF returns are assured, while NPS returns are not, despite the fact that NPS can generate higher returns over EPF in the long-term. Experts claim that investors should invest in both NPS and EPF because they each have their own combination of benefits and drawbacks. Using a blend of appropriate retirement options might be a smart strategy. As a result, by considering taxation on interest and maturity first, employees with higher income status can diversify their portfolio across (EPF+VPF), PPF, and NPS to maximise returns.