ULIPs vs NPS vs Equity Funds vs EPF: Which is better for retirement planning?

By | February 20, 2021

ULIPs vs NPS vs Fairness Funds vs EPF: Which is best for retirement planning?

For retirement planning, it is best to put money into a balanced portfolio that provides you a very good but secure return whereas permitting flexibility and excessive tax effectivity.

Slightly deviation in return on funding can considerably affect a retirement corpus. So, choosing the proper funding devices is essential while you work in direction of constructing an ample retirement fund. Tax effectivity, return prospects, stability, liquidity, and the extent of danger are a number of the key elements that play an vital position in choosing the proper funding merchandise to satisfy your retirement aim. It takes a few years of persistence, a extremely disciplined and focussed method, and well timed changes when required to attain this.

So, listed here are a number of the engaging funding merchandise that may show to be useful while you’re planning your retirement fund.

Unit Linked Funding Plans (ULIPs)

ULIPs are monetary devices with mixed options of insurance coverage and funding. So, while you put money into a ULIP, you not simply get a return however a life cowl too. ULIPs additionally enable tax deduction profit as much as Rs 1.5 lakh beneath Part 80C of the Revenue Tax Act. Earlier, ULIP proceeds have been tax-free topic to premium not exceeding 10% of the sum assured. Nonetheless, in Price range 2021, Finance Minister Nirmala Sitharaman has proposed to levy a tax on proceeds of such ULIP insurance policies for which the annual premium quantity exceeds Rs 2.5 lakh. The surplus premium above Rs 2.5 lakh might be liable for a similar tax therapy as fairness mutual funds when the long-term capital beneficial properties exceed Rs 1 lakh in a monetary 12 months. The LTCG over and above Rs 1 lakh on fairness mutual funds is taxed at a ten% price.

As such, in case you have been relying primarily on ULIPs for saving taxes and on your retirement planning, you could want to regulate your plan now. With ULIPs shedding the tax benefit to some extent, you could now discover different funding merchandise that would supply a greater return. Nonetheless, in case your annual ULIP premiums are lower than Rs 2.5 lakh, this proposal shouldn’t hassle you.

Nationwide Pension System (NPS)

When planning on your retirement, it will not be a good suggestion to rely fully on one asset class like solely fairness or debt. Nonetheless, the NPS provides you the selection to put money into a mixture of fairness, company debt, and authorities debt – as such, a excessive diploma of flexibility by way of the selection of asset courses. It additionally provides a tax deduction good thing about as much as Rs 1.5 lakh beneath Part 80C and a further tax deduction good thing about Rs 50,000 beneath Part 80CCD of the I-T Act. Now, an NPS investor is allowed to withdraw 60% of the corpus tax-free on reaching superannuation age. The remaining 40% needs to be compulsorily used to buy an annuity plan. The annuity earnings is later taxed at a slab price relevant to the investor.

As such, by way of funding flexibility and return prospect, NPS provides a superb selection. Nonetheless, it falls behind by way of tax on annuity earnings after retirement and lack of liquidity.

Fairness Mutual Funds SIP

Relating to long-term investments, particularly retirement planning, fairness mutual funds may supply a excessive return potential albeit with medium to excessive danger. You’ll be able to mitigate the funding danger to some extent and garner higher rupee-cost-averaging returns by investing by means of the SIP mode. The LTCG above Rs 1 lakh in a monetary 12 months on fairness mutual funds is taxed at a ten% price. If you happen to’re but to exhaust your 80C deduction advantages, you too can think about investing in tax-saving fairness funds known as equity-linked financial savings schemes (ELSS) to get increased returns if doing so is according to your danger tolerance. Relying in your age, danger tolerance, and return expectations, you could put money into fairness mutual funds. As you get nearer to retirement, you could cut back fairness mutual funds’ publicity to scale back the chance.

Fairness mutual funds supply engaging returns, excessive liquidity, and a very good degree of flexibility to the investor, making it a fantastic selection for retirement planning. Nonetheless, don’t ignore the related dangers whereas investing in mutual funds.

Staff’ Provident Fund (EPF) and Voluntary Provident Fund (VPF)

Funding security and comparatively increased returns than different debt devices make EPF a most well-liked funding automobile amongst salaried buyers for retirement planning. Actually, EPF is at present providing 8.5% p.a. returns when Public Provident Fund (PPF) is giving 7.9% p.a. whereas most private and non-private banks are providing 4%-6.5% p.a. on common fastened deposits amounting to lower than Rs 1 crore. Staff’ contribution to EPF permits tax deduction beneath Part 80C. Staff can voluntarily put money into retirement funds by means of the VPF mechanism that enables the identical curiosity as EPF.

Nonetheless, earlier than Price range 2021, the curiosity on EPF and VPF was exempt from tax. In Price range 2021, the federal government has proposed to levy tax on the curiosity earned if the annual PF contribution of workers exceeds Rs 2.5 lakh from the following monetary 12 months. This new announcement may make EPF barely much less in style amongst high-value buyers who contribute greater than, say, Rs 20,000 in a month by means of VPF. Nonetheless, the brand new Price range proposal will make no distinction to a majority of EPF buyers whose annual contributions are lower than Rs 2.5 lakh.

Closing phrases

For retirement planning, it is best to put money into a balanced portfolio that provides you a very good but secure return whereas permitting flexibility and excessive tax effectivity. Investing in a mixture of NPS, EPF, ULIP, fairness funds, debt schemes, FDs, gold and actual property are prone to be very useful. You must also hold monitor of coverage modifications whereas investing for retirement. Lastly, don’t hesitate in reaching out to a licensed funding planner in case you get caught at any level.

(The author is CEO, BankBazaar.com)

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