NPS is one of the good retirement scheme. Recently there were latest NPS withdrawal rules that came in 2018. PFRDA has relaxed guidelines where one can withdraw upto 25% of their NPS share based on certain tems and conditions. This could be beneficial to NPS investment holders. What are the Latest NPS Withdrawal Rules of 2018 talk about? What are the terms and conditions attached to it? Is NPS now attractive compared to investment options which are comparable? In this article, we would provide NPS comparison with EPF, PPF, Mutual Funds and Moneyback plans.
What is National Pension Scheme (NPS)?
National Pension Scheme / National Pensoin System (NPS) is a voluntary and defined contribution towards a corpus which is invested in the diversified portfolios comprising of government bonds, corporate debentures and shares. The Central Government has made NPS Scheme mandatory for all the employees who joined the service on or after January 1, 2004. It has since been adopted by most states also. It was extended to all citizens of India by the end of 2009. The returns in NPS are market-linked and hence the contribution would grow and accumulate over the years depending on the returns earned on the investments made. Dedicated pension fund managers are assigned the task of managing the investors’ money. The pension scheme provides a fixed income for a number of years after retirement. All citizens from age of 18 years to 65 years are eligible to invest in this scheme.
How does NPS work?
If you are already aware, skip this section.
1) Under NPS, an investor can open two accounts, called Tier I and Tier II account. Tier I is a non-withdrawable permanent retirement account whereas Tier II is a voluntary withdrawable account. Tier II can be opened and activated only when one has Tier I account. The minimum contribution in Tier I is Rs. 500 for all transactions. For Tier II account, the minimum contribution for opening an account is Rs. 1000.
2) On turning 60, the investor can make an exit from NPS but 40% of the pension wealth has to be utilized for the purchase of an annuity. In case, he withdraws the corpus before the age of 60, he will have to invest 80% of the accumulated corpus for buying an annuity.
3) NPS comes under EET tax structure which means that contributions are exempted, the growth in corpus is exempted but its withdrawals are partially taxed. A lump sum withdrawal above 40% of the maturity amount is taxable.
Latest NPS Withdrawal Rules 2018
As per the latest rule change from PFRDA (Pension Fund Regulatory and Development Authority), it has relaxed the withdrawal norms and now the investors can withdraw upto 25% of contributions starting form the third year of opening the NPS account. The latest rule change has been effective from January 10, 2018. It excludes contributions made by the employer. The purpose of withdrawal has also been defined by the PFRDA. The withdrawals can be made for the treatment of special illness of a family member, education of children, wedding expenses of children or purchase or construction of house. The investor can withdraw for a maximum of three times during the entire tenure of subscription. It is to be noted that partial withdrawals are tax-exempt.
Is NPS is now attractive compared to other plans?
After the relaxation of withdrawal rules form the government, it is expected that many more investors will be attracted towards this scheme. Here’s a comparison drawn between NPS and other investment options.
1) Comparison between NPS and Mutual Funds
The biggest advantage that NPS offers is its low cost structure and tax benefits u/s 80CCD(1) and 80CCD(2). On the other hand, it restricts the investor to invest in the combination of his own choice. It has a set structure as per the age of the investor and the fund managers invest accordingly. Moreover, NPS are highly illiquid also and at redemption, you do not get the entire invested fund also. You have to compulsorily purchase pension plan from the specified annuity equity provider.
Mutual fund is a better option for those investors who have appetite for moderate to high risk. There is no restriction on entry and exit age as it is available in NPS. There a huge number of fund houses offering several mutual fund schemes to choose from, whereas in NPS, PFRDA has appointed six pension fund managers where at the time of joining, you have to choose one fund manager to get yourself registered. Hence Mutual Funds score high compared to NPS if one looks at liquidity, choice of investment and returns. Do you know that you can invest as low as Rs 1,200 per month in Mutual Funds and become Crorepati.
2) Comparison between money back plans and NPS
The minimum annual contribution for NPS is Rs 6,000 which is much lower than money back plans which normally require Rs 20,000 annually (approx). The returns from NPS depend upon the nature of funds selected. However, a maximum of 50% can be invested in equity funds in high equity options in NPS whereas there is no minimum cap in money back plans. This makes the funds safer and fetches fewer returns. The commissions and charges are quite high in money back plans especially in the initial years, thus making the investment expensive if you are not aiming for long-term. Hence, NPS scores high compared to Money back plans.
3) Comparison between Public Provident Fund and NPS
A PPF account matures in 15 years which can be extended by a block of 5 years. In case of NPS, the maturity tenure is not fixed. One can make contributions till the age of 60 which can be extended upto 70 years also. The minimum amount to be invested in PPF is Rs.500 and maximum is Rs. 1,50,000. In NPS, a minimum of Rs. 6,000 is to be invested annually and a maximum of 10% of the salary or gross total income.
PPF investments are not exposed to market volatility. Its interest rates are declared by government. It’s the safest investment with low and definite returns. So, returns are likely to be higher in NPS as it is equity exposed and also the factor of professional fund management comes into the picture. Hence if you are looking for safe and fixed income, you can opt for PPF as part of Small Saving Schemes.
4) Comparison between EPF (Employees Provident Fund) and NPS
EPF is predominantly a debt instrument where a Board of Trustees declares the interest rate. Currently, it is running at 8.65%. On the other hand, NPS is a market-linked product. EPF is automatically deducted from the salary and in case of NPS; the investor has to invest in lump-sum or installments on its own. They both are complementary to each other rather than alternatives.
Conclusion: All the investment instruments come with different features and designed to meet the purposes of different people. One has to judge the criteria of investment on various parameters and then take the decision wisely. NPS is purely a retirement saving scheme as the funds have to be used for specified purposes only. NPS tends to be more suitable for conservative investors who do not prefer to take more than average risk. Its restrictive nature and compulsory annuity purchase make it suitable for very conservative and safe investors. Hence if you are thinking that NPS withdrawal rules of 2018 may influence you, it may not be true.
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