The market is abundant in investment schemes and products, and each is uniquely suited to some financial goal. Some of these schemes allow taxpayers to claim tax deduction benefits under specific sections of the Income Tax Act. Two schemes that allow investors to claim tax benefits under Section 80C of the Income Tax Act are NPS (National Pension Scheme) and NSC(National Savings Certificate).
What is NPS?
National Pension Scheme or NPS is regulated by the PFRDA or Pension Fund Regulatory and Development Authority. People usually opt to save in this scheme to accumulate wealth for post-retirement. The scheme works in two phases, the deferment phase, where the individual saves money, and the annuity phase, where they receive the accumulated money as a pension. NPS is a market-linked product, and the periodical saving (monthly or yearly) can be invested in more than one asset, such as debt or equity or both. Professional pension fund managers essentially manage these funds.
Using the online NPS pension calculators, investors can calculate their expected pension and lump sum amount received at maturity. The calculators consider the regular monthly investment, the investor’s age, the proportion of corpus reinvested to purchase the annuity, and assumed rates of return on investment and the annuity selected. So, if you want to have a fixed pension in your post-retirement years, NPS can be an excellent option to consider.
What is NSC?
National Savings Scheme or NSC is an initiative taken by the government of India. NSC is a savings bond that motivates its subscribers, usually small to mid-income investors, to invest. It is a low-risk, fixed-income investment option provided by the post office. One of the significant advantages of NSC is the tax benefit it provides.
NSC can be bought for a minor or as a joint account. NSC provides a steady interest flow and guarantees total capital and interest protection, thereby the low-risk factor. Being a fixed income scheme, NSC cannot provide inflation-beating returns like the NPS.
Investors can easily calculate their NSC returns before even investing in one. The NSC calculators available online calculate the maturity value and the interest earned from an NSC by taking variables such as the investment made and the rate of interest fixed. NSC time horizon is fixed at five years or ten years.
The NSC was launched mainly for individuals, and thus, Hindu Undivided Families and trusts are not eligible to invest in them. Also, only Indian residents can avail of this scheme, thereby barring its accessibility to non-resident Indians.
NPS vs NSC- which is better to invest in?
Any investment scheme is relative in terms of its benefits, as it varies as per the investor’s financial goals, risk appetite, time horizon, etcetera.
In terms of liquidity, NSC is of two types. NSC VIII Issue is for five years, whereas the NSC IX issue is for ten years.
Investors between 18 and 55 years can start investing in NPS, but they cannot withdraw any amount until they reach 60 years, and even then, they have to purchase a life annuity with 40 percent of the corpus.
In terms of risk, NSC, being backed by the government of India, is a low-risk investment product.
The risk in an NPS varies as per its asset allocation. The maximum exposure to equities an NPS can have is 50 percent through the stock market. This is riskier relative to NSC.
NSC offers fixed returns, the rate for which is decided at the beginning of every financial year. These returns are then cumulatively delivered to the investor at maturity. The current rate is 6.8 percent.
The returns on NPS are market dependent. The proportion of asset allocation determines the returns earned from the fixed income market and the equity markets.
There is no upper limit to investing in an NSC, but you cannot invest more than 10 per cent of your basic salary and the dearness allowance paid to you.
NSC has a lock-in period of five years, and both the principal invested, up to 1.5 Lakhs, and interest accrued(except the last year’s interest) qualify for tax deductions under Section 80C of the Income Tax Act. Investments of up to 1.5 Lakhs made towards NPS can qualify for tax deductions under Section 80C of the Income Tax Act. Additional tax deductions of Rs. 50,000 over and above the 80C limit can be made under Section 80CCD(1B). NSC is also exempted from tax deduction at source(TDS).
In conclusion, both these schemes have their benefits for the right investor. Any individual willing to opt between the two must consider the above points and their preferences and then make a well-informed decision. Also, a better judgement can be made if the investor calculates the returns from both schemes using online tools like the NSC calculator and the NPS calculator and get a comprehensive idea about the same.
