National Pension Scheme Compare

Additional Useful Information

• The minimum amount required to open a Tier 1 NPS is ₹500 and a Tier 2 NPS is ₹1,000.

• The minimum contribution amount to a Tier 1 NPS is ₹500 a month and ₹250 a month to a Tier 2 account.

• There is no maximum limit as to how much an investor can invest in this scheme.

• Government Employees must compulsorily contribute a certain percentage of their salary. Employers by mandate, also contribute a similar or slightly higher percentage of the employee’s salary to the scheme. For private companies and their employees, there is no compulsory contribution. It is optional.

• NPS matures when the investor turns 75 years old. Contributions can be made up to the age of 70.

• Any individual from the age of 18 to 70 can open an NPS Account.

• Withdrawal terms are as follows:
• Early Retirement (Before 60 Years - For Corporate AND Government Employees):
• At least 80% of the funds from the available corpus should be used to re-invest in an annuity. This annuity provides monthly income. The rest of the funds can be withdrawn as a lumpsum. This option is only viable after 10 years of starting the NPS account. It is to be noted that government employees are exempted from the 10-year rule.
• However, if the total funds in the corpus at the time of withdrawal are less than or equal to ₹2,50,000, 100% withdrawal can be exercised.

• On Retirement (At 60 Years, For Corporate AND Government Employees):
• Up to 60% of the total funds from the available corpus can be withdrawn, and the remaining 40% must be used to re-invest in an annuity plan.
• However, if the total funds in the corpus are less than or equal to ₹5,00,000, 100% withdrawal can be exercised.

• On Demise:
• For corporate employees, all the funds accumulated till date are paid to the legal heir of the investor.
• For government employees, all the funds accumulated till date are paid to the legal heir of the investor if the funds accumulated are up to ₹5,00,000. If the funds are greater than ₹5,00,000, 80% of the funds must be invested into an annuity by the dependents, and the remaining 20% will be paid out as a lumpsum to the heirs. Should there be no dependents, the remaining 80% of the corpus will be paid to the heirs.

• Partial Withdrawals:
• There are certain situations where funds from Tier 1 NPS can be partially withdrawn. These situations involve Children’s higher education, Children’s marriage, Purchase of residential property, Critical Illness treatment. The exact situations can be found in detail at Annexure_PFRDA_Circular_CRA_PO_RI_Master_2016_003.pdf (nsdl.co.in). The following explains the withdrawal conditions for a Tier 1 NPS:
• The investor must remain invested for a minimum of 3 years.
• Investors can withdraw a maximum of 25% of their contributions available in the Tier 1 Account. These withdrawals are tax free.
• These withdrawals can be applied for 3 times, with a minimum gap of at least 5 years between each withdrawal.
• Partial Withdrawals from Tier 2 NPS are entirely at the discretion of the investor. They can withdraw funds at any time they want unlike from Tier 1 NPS accounts. However, Tier 2 NPS do not enjoy the same tax benefits as the Tier 1 NPS accounts.

• Premature withdrawals:
• Tier 1 –
  • If the amount in the NPS Tier 1 account is up to ₹1,00,000, full amount is available for withdrawal.
  • If the amount in the NPS Tier 1 account is greater than ₹1,00,000, up to 20% of the amount can be withdrawn subject to income tax. The remaining 80% must be invested in annuities.
• Tier 2 –
  • Unlimited withdrawals are permitted. There are no tax benefits applicable to this account.

Returns *

• NPS invests in market linked instruments.

• Typically, NPS offers higher returns as compared to traditional tax saving and debt investment options.

• Pension Fund Managers under NPS offer only 4 asset classes for investment – Equity (E), Corporate Debt (C), Government Securities (G), and Alternative Investment Funds (A).

• NPS for private sector offers two types of asset allocation choices –
• Auto Choice – This is a default choice. This is generally for investors who don’t wish to make asset allocation decisions and are satisfied with automatic allocation decisions. Life cycle-based asset allocation approach is taken. In this, the portfolio of the investor is concentrated with equity during a younger age and as the investor moves towards retirement, the equity concentration is reduced. There are 3 types of life cycle funds that can be picked from.

• Active Choice – This is generally for investors who wish to make asset allocation decisions. These investors have the liberty to choose their own percentages of allocation. There are 3 types of investment funds under the active choice:
• Aggressive Life Cycle Fund (LC75) – 75% of the total assets are allocated to equity, which starts at the age of 35 and reduces as per the age of the investor.
• Moderate Life Cycle Fund (LC50) – 50% of the total assets are allocated to equity, which lasts till the age of 35 and reduces as per the age of the investor.
• Conservative Life Cycle Fund (LC25) – Capital of 25% of the total assets for Equity investment, which lasts till the age of 35 and reduces as per the age of the investor.

• NPS for Government sector employees offers only one type of allocation choice. The funds that can be picked from include: 
• Scheme (G) – 100% of the contribution invested in Government Bonds.
• Scheme (LC 50) – Equity investments are capped at 50%.
• Scheme (LC 25) – Equity investments are capped at 25%.

• Investment returns are dynamic and vary heavily depending on the market conditions, asset allocation type and the fund manager selected.

Risk Level

• National Pension scheme has a dynamic risk level. This is because every investor has a different asset allocation, and the pension fund manager is different.

• It is important to conduct further due diligence about the pension fund manager and how the current market conditions are since the returns of the national pension scheme are market linked.

Liquidity

• Tier 2 NPS accounts are far more liquid as compared to tier 1 NPS accounts. Tier 2 NPS accounts allow withdrawal at any time unlike tier 1 NPS, that have conditions when it comes to any sort of withdrawal.

• Investors can refer to ‘Additional Useful Information’ above to know more about the withdrawal terms.

Interesting Facts

• There are about 10 fund managers that can be selected from. Any one out of those 10 can be selected. The fund manager can be changed once a year should the investor want to.

• Investors can change from active allocation to auto allocation or vice versa up to 4 times a year should there be a need.

• The maximum allocation levels in active allocation for Equity (E) is 75%, Corporate Debt (C) is 100%, Government Securities (G) is 100%, and Alternative Investments (A) is 5%.

• The PFRDA (Pension Fund Regulatory and Development Authority) regulates the National Pension Scheme and reviews and tracks the pension fund managers.

• Generally, this scheme is used as a retirement planning option in India since the primary objective of this investment option is to pay pension to investors post retirement so that they have a source of steady income.

Tax Implications

• On Early Retirement (Before 60 years old):
• The amount received and invested into an annuity is taxable as per the tax slab of the investor.
• The returns from the annuity purchased are taxed as per the tax slab of the investor.
• Any lumpsum amount received is taxed as per the tax slab of the investor.

• On Retirement (At 60 years old):
• The amount received and invested into an annuity is tax free.
• The returns from the annuity purchased are taxed as per the tax slab of the investor.
• Any lumpsum amount received is tax free.

• On Demise:
• If the annuity has not been purchased, the entire corpus received by the heir is tax free.
• If the annuity has been purchased, the income from the annuity received by the heir will be taxed as per the income slab of the heir.

• On Partial Withdrawal:
• In Tier 1 accounts, the 25% of the corpus available for withdrawal under the withdrawal policy is tax free.
• Any withdrawals occurring in Tier 2 NPS accounts are taxed as per the tax slab of the investor.

• On Premature Withdrawal:
• In Tier 1 accounts, no tax is applicable if the withdrawal amount is up to ₹1,00,000. If it is greater than ₹1,00,000, up to 20% of the amount can be withdrawn subject to income tax as per the tax slab of the investor. The remaining 80% must be invested in annuities. The income from annuities is taxed as per the tax slab of the investor.
• In Tier 2 accounts, no tax benefits are applicable. Any withdrawals occurring in Tier 2 NPS accounts are taxed as per the tax slab of the investor.

• Under section 80C of the Income Tax Act, investors who contribute a minimum of ₹1,50,000 in the NPS scheme are eligible for a maximum tax deduction of ₹1,50,000. Another ₹50,000 can be deducted under section 80CCD(1B). This means, tax deductions up to ₹2,00,000 can be claimed.

• Under section 80CCD(2), employer’s contribution towards NPS is permitted as a deduction from the investor’s total taxable income. For central government employees, deductions cannot exceed 14% of the salary. For any other employees, deductions cannot exceed 14% of the salary. These deductions are above and beyond those received under section 80C and 80CCD(1B).

Where To Invest

• https://www.npstrust.org.in/open-an-nps-account

• https://www.icicibank.com/personal-banking/investments/government-schemes/nps-national-pension-system

• https://www.hdfcbank.com/personal/invest/nps-national-pension-system