Retirement is a phase of life where financial security becomes the top priority. Having a consistent income source is crucial for meeting daily expenses, medical costs, and maintaining a comfortable lifestyle. With increasing life expectancy and inflation, retirees must make informed investment decisions to ensure a steady flow of income. Two popular options for post-retirement income in India are the National Pension System (NPS) and Equity Savings Funds. While both have their advantages, choosing the right one depends on individual financial goals, risk tolerance, and expected returns.
What is the National Pension System (NPS)?
NPS is a government-backed voluntary retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It aims to provide financial stability after retirement by encouraging systematic savings. Subscribers contribute to the fund during their working years and receive regular payouts post-retirement.
Key Features of NPS:
- Tax Benefits: Investments in NPS qualify for tax deductions under Section 80CCD(1) and 80CCD(1B) of the Income Tax Act.
- Choice of Asset Allocation: Investors can allocate funds between equity, corporate debt, and government bonds.
- Annuity Requirement: At least 40% of the corpus must be invested in an annuity plan after retirement.
- Liquidity: Partial withdrawals are allowed under specific conditions but are highly restricted.
- Returns: The returns depend on market performance, making them variable.
What are Equity Savings Funds?
Equity Savings Funds are mutual funds that invest in a mix of equity, debt, and arbitrage opportunities. These funds aim to provide consistent returns while reducing market volatility.
Key Features of Equity Savings Funds:
- Diversified Investment: They invest in equity (for growth), debt (for stability), and arbitrage (for low-risk returns).
- Tax Efficiency: They are treated as equity funds for taxation purposes, offering benefits for long-term investors.
- Liquidity: Unlike NPS, these funds have no lock-in period, providing greater withdrawal flexibility.
- Returns: Historically, these funds have delivered stable returns with moderate risk.
- Market Linked: Returns depend on the performance of the underlying assets.
Comparing NPS and Equity Savings Funds for Regular Retirement Income
1. Risk and Stability
- NPS: While NPS has a defined structure and regulated framework, returns are subject to market fluctuations. The mandatory annuity portion offers stability, but the payout depends on annuity rates at retirement.
- Equity Savings Funds: These funds balance risk by diversifying across asset classes. While they are market-linked, their debt and arbitrage components reduce volatility.
2. Liquidity and Withdrawal Flexibility
- NPS: Withdrawals before 60 years of age are highly restricted. Upon retirement, 40% of the corpus must be used for annuity purchase, limiting liquidity.
- Equity Savings Funds: Investors can redeem their funds at any time, making them a better option for flexible withdrawals.
3. Tax Benefits
- NPS: Contributions are tax-deductible, but withdrawals are partially taxable. Only 60% of the corpus can be withdrawn tax-free, while annuity payments are taxable.
- Equity Savings Funds: If held for over a year, they qualify for long-term capital gains tax (LTCG) at 10% on gains exceeding ₹1 lakh.
4. Expected Returns
- NPS: The returns depend on asset allocation. Equity exposure in NPS is capped at 75%, which reduces potential gains compared to pure equity investments.
- Equity Savings Funds: These funds provide a balance of growth and stability, offering moderate returns with less risk than pure equity funds.
5. Annuity and Guaranteed Income
- NPS: The annuity portion provides a guaranteed pension, but the returns depend on prevailing annuity rates at retirement.
- Equity Savings Funds: These funds do not have a guaranteed income structure, but they offer systematic withdrawal plans (SWP) for steady cash flow.
Who Should Choose NPS?
- Individuals looking for structured retirement planning with government regulation.
- Those willing to sacrifice liquidity for tax benefits and a mandatory pension scheme.
- Investors with a low-risk appetite who prefer fixed annuities post-retirement.
Who Should Choose Equity Savings Funds?
- Retirees who need flexibility in withdrawals and a mix of capital growth and income.
- Investors with a moderate risk appetite who want tax-efficient returns.
- Those who prefer market-linked investments with a blend of equity and debt.
Both options have their merits, and the final decision should be based on individual financial goals, risk tolerance, and retirement planning strategy.
