National Pension Scheme is a voluntary retirement investment plan under the Pension Fund Regulatory and Development Authority (PFRDA) and Central Government.
National Pension Scheme NPS is an initiative by the Central Government open to employees from public, private and unorganized sectors. Earlier, this scheme was open only to public sector employees. Now, it allows all Indian citizens to opt for a voluntary scheme.
An investor can invest during the period of his/ her employment at regular intervals. Post-retirement, a percentage of the accumulated amount is allowed to be withdrawn. The remaining amount is received by the investor monthly as a pension post-retirement
NPS is a good option of investment for an investor who wants a regular source of income post-retirement. Since this scheme is regulated by the Central Government, the risk is also low. However, risk also depends on an individual’s earnings and cost of living and differs on how much risk an investor is ready to take given his earnings and spends.
Systematic investment in NPS during employment leads to a systematic and regular source of income post-retirement, especially for private and unorganized sector employees.
|Particulars||NPS Tier-I Account||NPS Tier-II Account|
|Minimum Amount||Rs 500 or Rs 1000 in a year must be invested||Rs 250 must be invested|
|Maximum Amount||No Limit||No Limit|
|Tax Implication||Deduction u/s 80C up to Rs 1.5 lakh
Deduction u/s 80CCD up to Rs 50000
– Deduction u/s 80C up to Rs 1.5 lakh
– No deduction
An NPS account can be opened both online and offline. The entire process is mentioned below:
Follow the below steps to apply for an NPS account online
Follow the below steps to apply for an NPS account offline
NPS scheme promotes regular investment by the investor until retirement and provides a monthly pension after retirement. However, it also allows an investor to withdraw a certain portion of the amount invested on specific occasions.
NPS allows an investor to withdraw the investment made. This withdrawal also comes with terms and conditions.
An investor can withdraw up to 25% of the total investment if he has invested for a continuous period of 3 years towards the NPS account. An investor is allowed to withdraw 3 times but there must be a gap of 5 years between the previous withdrawal and the withdrawal opted for.
This withdrawal is allowed only on specific occasions listed below:
An investor is allowed to withdraw 60% of the investment once he reaches 60 years of age. The rest 40% of investment is retained to provide a monthly pension to the investor. No tax is levied on the withdrawal of 60% of the investment after the age of 60 years
NPS invests in various schemes. Investment in equity is made under the Scheme E of the NPS. An investor is allowed to invest up to 50% of the total investment in equity. Two equity allocation options are available to an investor:
|Scheme||Rate of return||Lock-in period||Risk||Tax Implications|
|NPS||8% to 10%||Till retirement||Depends on market fluctuation||Deduction u/s 80C up to Rs 1.5 lakh. Additional Rs 50000 u/s 80CCD (1B)
Withdrawal after retirement up to 40% of the fund is tax-free
|PPF||8.10%||15 years||No-Risk||Principal amount deductible u/s 80C deduction
|FD||7% to 9% varies Bank to Bank||5 years||No-Risk||Principal amount deductible u/s 80C deduction
|ELSS||12% to 14%||3 years||Depends on market fluctuation||Principal amount deductible u/s 80C deduction
Interest- 10% LTCG
Dividend- 10% DDT
ELSS primarily invests in equity-oriented mutual funds while NPS has a lower allocation of funds towards equity-oriented mutual funds. Hence, ELSS has a higher potential to generate higher returns than NPS
ELSS has a lock-in period of 3 years while NPS has a lock-in till retirement which is much higher than ELSS
Since ELSS has a higher exposure to an equity-oriented mutual fund, the risk associated with investment is also high. However, the risk factor depends on how much risk an investor is ready to bear depending on his own cost of living and earnings.
NPS is an investment scheme aimed to provide a regular income post-retirement. It invests a portion of the funds in equity and this portion is exposed to market fluctuations, risks, and rewards. The quantum of exposure in equity is dependent on multiple factors. With the objective of income and wealth creation, an investor can also explore SIP, equity-oriented mutual funds, debt-oriented mutual funds. These options are also exposed to market fluctuations and risk but come with the bonus of higher returns. Again, depending on how much risk an investor wants to take depending on his cost of living and earnings, the decision could be made.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.