Should you invest in equity mutual funds or ‘new’ NPS for retirement?


NPS is in news again. The recent ‘more tax-friendly’ tag is helping the government-sponsored retirement scheme to hog the limelight once again. For the newcomers, the government has decided to make the NPS more tax friendly last week by allowing tax-free withdrawal of 60 per cent of the corpus at the time of retirement. NPS subscribers must compulsorily use 40 per cent of the accumulated corpus to buy an annuity from an annuity provider.

Earlier, NPS subscribers could withdraw only 40 per cent of the corpus tax free. They were forced to use 40 per cent of the corpus to buy an annuity, and they had the option to use the remaining 20 per cent to buy an annuity or withdraw it after paying tax on it.

Some investment experts believe that individuals should now seriously consider investing in the `new tax-friendly’ NPS to fund their retirement. That has revived the old question once again: should you invest in mutual funds or NPS to build your retirement corpus?

First, pause and think. What has changed? It is not EEE or totally tax-free as some experts would like to believe. Earlier, you could withdraw only 40 per cent of the corpus tax free. Now, you can withdraw 60 per cent of the corpus tax free. You still must use 40 per cent of the corpus to buy an annuity.

Two, you should look at NPS if you are keen to invest in a government-sponsored product to save for your retirement. Also, you should be willing to invest regularly until you are 60 years old. Remember, you can only withdraw 20 per cent of the corpus if you want to get out of the scheme before you are 60 years old. You must compulsorily buy annuity with the remaining 80 per cent of the corpus.

Do not treat this point lightly. You may decide to retire early or some extraordinary circumstances might force you to dip into your savings. However, you simply cannot withdraw more than 20 per cent of the corpus in NPS before you are 60 years old or your retirement.

Also, investing in an equity mutual fund offers you a lot of freedom while handling your investments. For example, if you are not happy with your fund manager, you have the choice of many others. In NPS, you can choose only from the pool of NPS fund managers. Also, you can decide how to use your mutual fund corpus at the time of retirement based on the circumstances. You don’t have to compulsorily settle for annuity that will pay you poorly. Remember, annuity income is taxed like regular income.



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