Should I invest in NPS or build my own retirement corpus through mutual funds?
I want to understand whether putting money in the National Pension System (NPS) really makes sense for long-term wealth building as compared to investing in mutual funds on my own. I know NPS gives some tax benefits and is perhaps a more disciplined way of investing, but the returns and withdrawal rules looks too much restrictive to me. On the other hand, mutual funds look more flexible but has its own risks. Tell me, which option actually will help me build a bigger and more efficient retirement corpus in the long run?
If our main goal is to build long-term wealth with flexibility and control, I think mutual funds are generally a better choice than NPS.
Mutual funds allow us to decide how much to invest, where to invest, and when to withdraw.
In a mutual fund, we can stay fully invested in equity for decades, which eventually helps in wealth creation over time. Plus, long-term capital gains from equity mutual funds are taxed at a lower rate compared to NPS annuity income.
But why I’m talking about annuity income here? What happens after you have built your wealth and start using it? In mutual funds, when you sell your investments after a year, your profit is treated as long-term capital gains, taxed at only 10% (after a small exemption).
In contrast, with NPS, when you retire, at least 40% of your total savings must be used to buy an annuity, and the monthly income you get from that annuity will be taxed as regular income according to your tax slab. So this way you can see, net tax on NPS income is much higher than 10% (of a typical equity fund).
So, even if both grow well during the investment period, the post-retirement taxation on NPS income can eat into your returns more than mutual funds do.
NPS, on the other hand, is a low-cost and disciplined option mainly designed for retirement. However, it comes with restrictions. For example, you can’t withdraw freely before 60. Even at retirement, at least 40% of your corpus must be used to buy an annuity. In NSP, the equity exposure is also capped at 75%, which limits growth (especially for those investors whose investment horizon is very long.)
So, if flexibility and higher growth potential matter more to you, mutual funds make more sense.
Disclaimer: This content is for informational purposes only and should not be considered investment advice.
