NPS and it’s Mutual Fund alternative

What is a National Pension Scheme NPS?

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

Benefits of investing in NPS in India

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.

Types of National Pension Scheme

Particulars	NPS Tier I Account Details	NPS Tier II Account Details
Status	Default	Voluntary
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

How to open an NPS account?

An investor can open an NPS account both online and offline.

Online application

• Follow the below steps to apply for an NPS account online and KYC verification
• Visit the eNPS website to register
• Link your mobile number, PAN number and Aadhar number to the account
• Validate your registration using the OTP received at your registered mobile number for a successful KYC verification
• On successful registration, Permanent Retirement Account Number (PRAN) will be received. PRAN is mandatory to login to the NPS account

Offline Process

Follow the below steps to apply for an NPS account offline

• Visit the nearest Point of Presence (POP) center branch, post office or bank branch and collect the application form
• Fill the application form, sign and submit along with Know Your Customer (KYC) documents. 
• On the first investment towards NPS, the POP center will send the PRAN along with the password
• A registration fee of Rs 125 is applicable for offline registration

NPS withdrawal rules

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.

Withdrawal before the age of 60 years

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:

• Marriage of children
• Higher education
• Buying or building a house
• Medical treatment of self or family

Withdrawal after the age of 60 years

• 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 investment allocation rules

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: 

Active Choice

An investor is allowed to decide the scheme and type of split 

Auto Choice

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

Comparison of NPS with other tax-saving schemes

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

Comparison of NPS with ELSS, tax saver mutual fund

Equity Investment

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

Lock-in period

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

Risk Exposure

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.

Conclusion

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.

How to use Scripbox’s NPS Calculator?

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:

• Select the investment type i.e. monthly or yearly
• Enter the monthly amount or yearly amount 
• The current age of an investor 
• The withdrawal % on retirement from the NPS account

On the basis of the above details provided the NPS returns calculator calculates the following,

• Total amount invested and investment period
• The wealth gained
• The monthly pension amount post retirement.