A lot of people have asked me if National Pension Scheme (NPS) is a good investment instrument or option. However, let us look at what NPS is, its variants and how it compares to PPF before I answer that question.
What is NPS?
NPS is a government-sponsored pension program open to employees from the public, private and unorganized sectors (except for the armed forces). One can invest regularly in a pension account through the tenure of the employment. Post retirement, the account holders can get a certain percentage of the corpus as a lump sum and the rest as monthly pension.
There are two types of NPS accounts: Tier I and Tier II
Tier 1 account is non-withdrawable till the age of 60 years (except for specific situations).
Subscribers of Tier 2 account can withdraw money whenever they want.
Additionally, there is an option to choose from various investment options like Equity funds, Government bonds, Government securities, etc. Partial withdrawals up to 25% of the contribution, subject to certain conditions, are allowed. Moreover, individuals can withdraw up to 60% of the corpus as a lump-sum payout and have to invest the remaining 40% in an annuity plan.
NPS under section 80 CCD
Section 80CCD is about the deductions available against contributions made to the NPS for income tax purposes.
(1) For NPS Tier 1 Account, to be eligible for income tax deductions one must contribute a minimum of Rs. 6,000 per annum or Rs. 500 per month.
(2) For NPS Tier 2 Account, to be eligible for income tax deductions one must contribute a minimum of Rs. 2,000 per annum or Rs. 250 per month.
Even 80 CCD has two sub-sections: 80 CCD(1) and 80 CCD(2).
Under section 80 CCD(1), earlier, individuals could claim a tax deduction of Rs. 1.5 Lakh (basis their investment in PF, PPF etc.). Government brought an amendment to this in 2015 under which if you were to invest in NPS, you could get income tax deduction upto Rs. 2 Lakh.
Under Section 80CCD (2) salaried individuals can claim deductions up to 10% of their salary (basic pay and dearness allowance) or is equal to the contributions made by the employer towards the NPS. There is no absolute upper cap in terms of the actual amount, hence, higher your basic + DA, more beneficial it is. The only caveat is that for you to claim any deduction under 80 CCD(2), the amount has to come from your employer.
For example, suppose your basic+DA = Rs. 2 Lakh per month. Then only if your employer puts in 10% of Rs. 2 Lakh i.e. Rs. 20,000 per month then that is eligible for income tax deduction. You might be wondering, but why would my employer do so? The answer is in your CTC. Your employer would not be giving you any extra money, what they would be doing instead is taking a portion of your CTC which is equal to 10% of your basic+DA and instead of giving it to you, they would put it in your NPS account.
Key differences between NPS and PPF
|Who can invest?||Any Indian resident. One can also open a PPF account in the name of his or her minor children||NPS account can be opened by Indian citizens above 18 years and less than 60 years of age|
|Are NRIs eligible for this scheme?||No||Yes|
|What is the maturity period?||A PPF account matures in 15 years. One can extend this term after 15 years by a block of five years with or without making further contribution||The maturity tenure is not fixed. You can contribute to the NPS account till the age of 60 years with an option to extend the investment to the age of 70 years|
|What is the investment limit?||Minimum Rs. 500 annually, with the maximum amount capped at Rs. 1,50,000. A maximum of 12 contributions per year is allowed||Minimum contribution required is Rs. 6,000. There is no limit on contribution as long as it does not exceed 10% of your salary or 10% of your gross total income in case you are self-employed|
|Is premature withdrawal/partial withdrawal allowed?||Partial withdrawals are allowed after the 7th year onwards with some limitation. Loans during the third and sixth financial years of opening the account are available; but subject to conditions||After 10 years, account holders become eligible for early, partial withdrawal under specific circumstances. However, to exit before retirement, one must use at least 80% of the accumulated corpus to buy a life insurance annuity|
|Can I choose how to invest my money?||No||Yes, you can choose between equity funds, government securities fund and fixed income instruments, and other government securities|
|What are the returns like?||Interest rate is decided by the government||Interest rate is linked to the market. Potential returns are therefore higher|
|Do I have to buy an annuity?||No||At maturity, you need to buy an annuity worth at least 40% of the corpus, unless maturity amount is less than 2 lakh|
Advantages of NPS – is NPS a good option?
1) Possibility of higher returns
Returns on NPS funds can be higher than EPF considering one can choose the instruments (debt vs equity).
2) Very cheap plan
It is one of the cheapest pension plans in the whole world. It has a one time enrollment fee of Rs. 125, the fee for each financial transaction is 0.25% (min. Rs 20 and max. Rs. 25000). Account opening charges are Rs. 50 and the annual maintenance charges are Rs. 190. At 0.01%, the scheme also has the lowest fund management charges.
3) Easy to maintain
Once you open an NPS account, you are provided with a PRAN or Permanent Retirement Account Number. You would also get a login id and password which can help you do the transactions online.
4) Withdrawal exemptions on Tier II account
While Tier I account has withdrawal restrictions, any amount can be withdrawn anytime from Tier II account.
All in all, I would say NPS is a good option especially if your employer is offering it. That way, you can get to invest 10% of your Basic + DA and get great tax free returns on the same.