National Pension Scheme – Is it the best savings scheme for you?

The National Pension System is a voluntary contribution based retirement savings scheme. The scheme first came into effect in 2004 and its present form, the New Pension Scheme was established in 2009. The National Pension Plan was put in place to force citizens of the country to plan for their future post-employment.

As most of you are well aware, there are a number of saving schemes in place. So, how do you decide which one is better suited to your needs?

Read on to learn about the various saving schemes and how NPS fares in comparison to them.

1.  NPS v/s PPF

Before we delve into the main differences between NPS and the Public Provident Fund (PPF), we’ll learn the key features of the PPF.

What is the Public Provident Fund?

The PPF is a government-initiated small savings scheme. The key features of this scheme are that it gives added security to your investment in addition to its high interest rates. The minimum and maximum investment amounts to a PPF account/annum are INR 500 and INR 1 lakh respectively (Max term of 15 years). The investments earns you an annual interest of 8.70% that is compounded yearly.

The benefits of holding a PPF account are that:

  1. You can make small investments, for a long period of time.
  2. Amount in a PPF account is completely tax free
  • You get a tax rebate per section 80C of the Income Tax Act

Difference between NPS and PPF?

Criteria NPS PPF
Eligibility Open to Indian citizens and Non-Resident Indians (NRI) Open to Indian citizens only
Minimum Age 18 to 60 Years No minimum age. Accounts can be opened in the name of minors (parents as custodians)
Rate of Interest 10.00% to 12.00% (depending on the market scenario) 8.70% (Fixed)
Contributions Minimum = INR 6, 000

No Max limit

Minimum = INR 500

Maximum = INR 1 Lakh

Taxes Contributions made to NPS is deductible from the total income (Section 80 CCD) Tax free

 

As you ca see the major difference is in the taxability and rate of interest you get on your contributions. To get the highest possible return from your NPS India account it is advisable to carefully choose the best NPS Fund Manager.

2.  NPS v/s Mutual Funds

What is a mutual fund?

A Mutual fund is essentially money pooled in by a large number of investors and managed by a professional fund manager. The professional fund manager works for the trust that pooled all these funds. These funds are invested in equities, bonds, money market instruments, etc. Returns or profits generated from these investments are given to the investors after certain expenses have been removed

Difference between NPS and Mutual Funds?

The differences between these two schemes come about in the way their respective funds are handled i.e National Pension Fund (NPS funds) and Mutual Trust Fund.

Criteria NPS Mutual Funds
Liquidity Partial liquidation of funds allowed (governed by strict rules) Highly liquid
Flexibility NPS funds are rigid as annuity purchase is mandatory on withdrawal. Highly flexible. Investor has complete freedom to select best fund deployment options.
Asset Class Choices Three. Equity, Corporate Bonds, and Government Securities. Array of asset choices available
Pension Fund Manager Highly restricted. Only 1 can be chosen from a pool of 8. No restrictions
Cost 0.1-0.25% Higher than NPS
Limit on Equity Purchase 50% No limit
Max Age (at Entry) 65 No age limit

3.  NPS v/s EPF

What is Employee Provident Fund (EPF)?

The employee provident fund scheme was one of the first retirement saving schemes to be implemented by the government. Established in 1952, this was put in place to promote savings for employees across the country. Every month the employee and the employer make a fixed contribution to the employee’s PF account. Employees can earn interest on their PF balance.

As per the New Pension Scheme, employees under the EPF bracket are free to shift to NPS and avail its attractive tax benefits

Difference between EPF & NPS?

Criteria  NPS EPF
Investment of contributions ·         NPS contribution can be invested in 3 types of assets i.e . Equity, Corporate Bonds, and Government Securities

 

  • Max 50% of account sum can be exposed to equities

 

  • Tier 1 government employees have only 15% exposure to equity.

·         Pension dependent on market conditions.

  • EPF contributions are invested in Central and State Government Securities.

 

  • Investments are also made in bonds and deposits of PSUs.

 

  • Pension of the contributor is independent of market conditions.

 

·         Compounding rate of interest paid irrespective of returns from equity.

Rate of returns Vary based on market conditions, monthly contribution, percentage exposure to equity, etc. Average rate of return is between 12-14% The average EPF rate of returns is between 8.00% – 8.50% p.a.
Liquidity and withdrawals
  • Funds cannot be withdrawn until the contributor attains the age of 60
  • Partial withdrawal is allowed in case the contributor invests 80% of the NPS wealth in an annuity scheme.

·         Withdrawals made after the age of 60 require 40% to be invested in annuity.

  • Withdrawals allowed under certain circumstances
  • Up to 6 times the member’s salary can be withdrawn for medical treatment.
  • Up to 36 times the member’s salary can be withdrawn for repayment of a house loan
  • Up to 24 times the member’s salary can be withdrawn for purchase of a site or plot of land.
  • Up to 12 times the member’s salary can be withdrawn to repair and remodel his / her home.
  • Up to 50% of the contributions made can be withdrawn up to 3 times for marriage or education.
Income Tax benefits and deductions
  • All funds except those invested in annuities are taxable at prevailing rates.
  • Contributions of up to Rs.2,00,000 are deductible from taxation under Section 80C and Section 80CCD(1B).
  • Contributions made are tax-free under Section 80C.
  • Interest earned and withdrawals are not taxed.
  • No additional benefits apart from 80C deductions.

4.    NPS v/s Atal Pension Yojana

The NPS v/s APY debate began the moment Shri Arun Jaitley announced the scheme in 2015. In essence, both of these schemes are there to encourage post-retirement savings. But, they are targeted to particular age groups and their financial security. Let us delve into the differences.

  1. NPF v/s APY – The Difference
Criteria NPS APY
Joining Age 18-55 Years 18-40 Years
     
Eligibility Open to Indian citizens and Non-Resident Indians (NRI) Open to Indian citizens only
Pension National pension plan does not guarantee a pension post retirement Atal Pension plan gives complete guarantee of pension post retirement
Tax Benefit Tax rebate of up to INR 2 Lakhs No tax benefits
Premature Withdrawal Withdrawal allowed from Tier 2 accounts Allowed only in case of Subscriber’s death
Investment Choose the asset you wish to invest your funds in No choice of investment
Type of Account The National Pension Plan gives you two types: Tier 1 and Tier 2 The Atal Pension Plan gives you only one type of account
Government Contribution No contribution made by the government in the New Pension scheme. Monetary support provided in the Atal Pension Yojana

5.  NPS – Fees & Charges

While subscribing to an account you will incur a number of NPS charges and fees. To help you fully understand the charges we’ve broken them down into a mini list.

  1. Charges at POP (Points of Presence)

A Point of Presence is a bank that’s been appointed by the PFRDA to cater NPS account opening. In case you decide to subscribe a NPS account offline, these are the charges incurred:

  • INR 200 – Subscriber registration
  • 25% Employee contribution – Initial Contribution Upload fee
  • 25% Employee contribution transaction fee
  • INR 20 – Transactions not related to contribution
  • .1% of Employee Contribution – eNPS for subsequent contributions
  • INR 50 – Persistency

Popular POP or NPS providers:

  1. CRA(Central Record Keeping Agency) Charges

Agency that handles bookkeeping, administrative and customer related duties.

  • INR 40 – PRA opening
  • INR 40 – PRA maintenance
  • INR 3.75 – Charge/Transaction
  • .01% of contribution – Investment management fee
  • .0032% of contribution – Custodian fee
  • .01% of contribution – NPS Trust fee

6.  National Pension Scheme – Advantages and Disadvantages

No savings scheme is perfect. When it comes to choosing the right investment options, you have to take into account the pros and cons of each and make an informed choice. Lucky for you, we’ve marked what we like and don’t like about the National Pension Scheme.

NPS Advantages

  1. The NPS PFRDA, or the regulatory authority managing all pension accounts always appoints able and experienced fund managers. This coupled with strict investment guidelines ensure you get good quality returns.
  2. NPS scheme returns are the highest when you compare them with other savings schemes
  3. Zero restriction on investments to either Tier 1 or Tier 2 accounts
  4. Investments can be as low as INR 500/month or INR 6000/annum
  5. Easy to subscribe. Simple documentation process make everything hassle-free
  6. Open to all citizens of India and NRI’s
  7. Can open two accounts (Tier 1 and Tier 2)
  8. Low maintenance charges
  9. Option to change fund manager

NPS Disadvantages

  • Lesser benefits for government employees in comparison to older pension schemes
  • Strict withdrawal guidelines
  • Withdrawal lump sum is not exempt from tax
  • Only 50% of account value can be invested in equities
  • No fixed returns. Rates of interest are dependent on the market scenario