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. It allows an investor to withdraw a percentage of the accumulated amount Post-retirement. The investor receives the remaining amount monthly as a pension post-retirement
NPS is a good retirement solution for an investor who wants a regular income source post-retirement and wants to save tax. Since the Central Government regulates the scheme, the risk is also low. However, risk also depends on an individual’s earnings and cost of living. It differs on how much risk an investor is ready to take given his earnings and expenses.
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 Details||NPS Tier II Account Details|
|Minimum Amount||Rs 500 or Rs 1000 in a year must be invested||Rs 250 must be invested|
|Maximum Amount||No Limit||No Limit|
|Withdrawal||Not Allowed||Allowed for Tier II Account|
|Tax Benefit||Deduction u/s 80C up to Rs 1.5 lakhDeduction u/s 80CCD up to Rs 50000||Government Employees– Deduction u/s 80C up to Rs 1.5 lakhOthers– No deduction|
An investor can open an NPS account both online and offline.
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 a partial withdrawal of a certain portion of the amount invested on specific occasions.
NPS allows an investor to withdraw the investment made. This partial 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 can withdraw 3 times on filing the withdrawal form. For a withdrawal 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:
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:
An investor is allowed to decide the scheme and type of split
Here the scheme is dependent on the risk profile of the investor and accordingly the scheme and split of investment are decided by NPS. For example- If an investor is old, the choice of investment will be less risky and more stable
Below we have presented a comparison of NPS with other tax- saving schemes
like Public Provident Fund, Fixed Deposit, and ELSS.
|Scheme||Rate of return||Lock-in Period||Risk||Tax Benefit|
|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|
|Public Provident Fund||8.10%||15 years||No-Risk||Principal amount deductible u/s 80C deductionInterest: Tax-free|
|Tax Saving Fixed Deposit||7% to 9% varies Bank to Bank||5 years||No-Risk||Principal amount deductible u/s 80C deductionInterest: Taxable|
|ELSS||12% to 14%||3 years||Depends on market fluctuation||Principal amount deductible u/s 80C deductionInterest- 10% LTCGDividend- 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 tax saver mutual fund 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. The funds are managed by a fund manager who is responsible and active management of the funds. A fund manager ensures and aims at a higher return for the mutual fund portfolio.
NPS is a retirement solution 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 to save tax and create wealth, 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.
You can use Scripbox’s NPS returns calculator and estimate the pension amount, amount invested in annuity, wealth created etc.
You only need to follow the below steps:
On the basis of the above details provided the NPS returns calculator calculates the following,
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.