NPS vs Other Pension Schemes
The launch of New Pension Scheme (NPS) paved the way to invest in the scheme for common people, which was open to only government employees earlier, thus, making the pension management easier. The money invested in this scheme will be returned partly as a lump sum and the rest as an annual payment or pension, upon maturity. The most striking feature of the scheme is that it carries the lowest administrative charges and fund management charges (FMC) in the market, with FMC capped at 0.0009% and custodian charges in the range of 0.0075% to 0.05%.
Let's take a quick look at Table 1 which compares NPS with other pension schemes available in the market such as MF Pension Scheme, Insurance Pension Fund Scheme, EPF and PPF, on the basis of different charges.Looking for Insurance pension schemes:
NPS charges a flat Rs 470 per year plus 0.0084 per cent which will go down further with an increase in the volume. In Mutual Fund product, we have considered UTI Retirement Benefit Pension; it provides a tax benefit of Rs 1,00,000 under Section 80C. The entry load for the scheme has been put at 0 per cent as per the SEBI ruling, effective from Aug 01, 2009. For Insurance PF scheme, we have considered ICICI Pru LifeStage Pension scheme, which comes with a total charge of 1.81 per cent. While in EPF and PPF, there are no entry loads and transaction charges.
Table 1: Charges under Different Pension Schemes NPS Mutual Fund1 Insurance PF Scheme2 EPF PPF Flat Charge @ Rs 470 Entry Load @ 0% FMC3 @ 1.50% Nil Nil Custodian Charge @ 0.0075% Expense Ratio @ 1.25% Policy Administrative Charges @ 0.25% Nil Nil FMC @ 0.0009% STT4 @ 0.125% STT5 @ 0.125% Nil Nil Rs 470 + 0.0084% 1.29% 1.81% 0 0 1 UTI Retirement Benefit Pension, 2 ICICI Pru LifeStage Pension 3 Fund Management Charges, 4 Portfolio Turnover Ratio of 33%, 5 Portfolio Turnover Ratio of 50%
If we consider an annual investment of Rs 1,00,000 for a tenure of 30 years across all the mentioned schemes, NPS will emerge as the best scheme in terms of maturity amount on account of its lower initial charges. Here, the rate of return has been pegged at 10 per cent considering the historical returns. In terms of maturity amount, as given in Table 2, NPS pays out Rs 1.801 crore, which is the highest among all pension schemes considered. It is followed by Insurance PF scheme and MF Pension scheme that give Rs 1.776 crore and Rs 1.785 crore, respectively.
But NPS loses some shine when it comes to the mandatory investment of 40% of its payout in an annuity, for it follows the EET (exempt, exempt, tax) model. Moreover, the investor has to pay a tax on the remaining 60 per cent of the payout, which he/she receives as a lump sum, as per the prevailing income tax slab. Even if the investor puts the entire maturity amount in an annuity scheme, the interest received would be taxed at 20 per cent with indexation (See Table 3). In comparison, Insurance PF scheme offers 33% tax-free payout. In case of Mutual Fund, EPF and PPF, the entire amount is tax-free in the hands of investors.
Table 2: Returns on an annual investment of Rs 1,00,000 for 30 years Rate of Return Charges Maturity Amount NPS 10%* Rs 470 flat + 0.0084% 18,007,779 MF Pension Scheme 10%* 1.291% 17,853,235 Insurance PF Scheme 10%* 1.813% 17,766,383 PPF 8%# 0.000% 12,234,587 EPF 8.5%# 0.000% 13,477,298 * Based on the past performance
#The returns are fixed
Table 3: Exempt, Exempt, Tax (EET) effect on the Maturity Amount Tax Structure NPS 60%1 payout + 40% annuity3 Insurance PF Scheme 33%2 payout + 67% annuity4 MF Pension Scheme Nil PPF Nil EPF Nil 1Payout would be taxed at personal income slab.
2 Payout is tax-free.
3 &4Interest on annuity would be taxed at 20 % with indexation.
Will NPS work for you?
NPS is definitely the need of the hour. It provides a compulsory social security to the citizens as prevailing in the developed countries and also scores over other pension schemes in management fees and custodian charges. But the current tax structure (EET) and flexibility can mar the scheme because in NPS the maturity amount is taxed as per the individual income tax slab and the money is locked till the maturity, unlike in other schemes that come with an option to withdraw money. Moreover, interest on the annuity is taxable in the hands of investors as per their income tax slab. It is important for the government to remove these flaws so that more and more people are encouraged to invest in the scheme to protect their future. We hope the FM is listening.
9 Responses to “NPS vs Other Pension Schemes”
Kurian said on June 20th, 2010 at 6:27 pm
Whether the premium is fixed like in LIC insurance plans? ie, can we pay a variable amount of our choice every time – say Rs10000, 25000, 13000 etc every month depends upon the cash we have?
I heard that minimum four times in an year one has to pay and minimum 6000 per year has to be paid. However no where I have seen whether the premium is flexible or fixed. Can anybody clarify?
AS said on August 30th, 2010 at 2:57 pm
no fixed premium. only thing is that it should satisfy the minimum amount condition.
Aditya Sethi said on September 22nd, 2010 at 4:58 pm
NPS is coming under DTC (direct tax code) will in EEE (Exempt Exempt Exempt). In addition to this, currently Finance Minister has extended a special scheme for moving this script widely. As per this scheme Govt. of India will deposite a sum of Rs.1000.00 for 3 consecutive years as an incentive.
This scheme looks good, once the DTC Bill is cleared.
Dinesh said on December 11th, 2010 at 10:42 pm
I had opened an account with a contribution of 2000 in Tier I and 12000 in Tier II but the fund valu ii Tier I is 1942.87 and in Tier II as 10623.28 as on 11.12.10 I had opened this account in june. so after investing 14000 the fund value is around 12 thousand odd rupees. the charges on the site show only in all about 140 rupees. the charges are vague and also by the face of it looks like I have lost a lot of money.
D A Bbatt said on September 2nd, 2011 at 2:10 pm
I hope; NPS authorities may pay due attention to private subscribers with auto choice life cycle fund beacause in some cases return is negative right fro day of inception. Parlimentory panel recommendation (HINDU, Aug 31,2011) for nps may be implimented and such cases may be covered for due compensation on humanity ground. A pention fund should not generate negative return.
P S Chauhan said on October 17th, 2011 at 12:51 pm
I agree with D A Bhatt. There is clear cut difference between an investment return and pension. First is for monetory benifit always involving market risks while second is a social security in old age. Most empolyees from non-financial background can not manage an NPS account efficiently and society (here government) is transfering its responsibility to people whose aim is to get profit irrespective of whether employee's money is increased or decreased as per market trends. The situation becomes even worse with growing age due to increased physical, mental and social constrains.
Also, the scheme of pension to politicians for short stints is not only in existance but is enhanced with time while it has been virtually scraped for government employees who do'nt have any other means of increasing their wealth (they are not allowed to do businees in their spare time).
Therefore, till all the creases are smoothen out, government should continue with responsibility to protect the interests of .empolyees in old age when they need it even more. In essensce, GPF and CPF should continue for government employees and NPS may be offered to individuals and employees of unorganised sector on volunteer basis.
jashbir singh said on December 7th, 2011 at 3:32 pm
i opened an account of NPS in state bank of india and i personally filled up form for tier-II but on recieving statement the account opened for tier-I. could you pls tell me how to change the account mode from tier-I to tier-II ? Next question is out of all five fund managers which one is the best as per your expertation ? i choosed SBI but now i realized i made a mistake. pls advice on above matters.
Sumit said on April 10th, 2012 at 3:08 pm
How NPS is different from VSS (Voluntary Superannutation Scheme)?
Pankaj said on June 30th, 2012 at 9:06 pm
Hi I live in Nasik Maharashtra.I want to go for NPS so i approach to Main branch of ICICI Bank Nasik. But they people dont know about NPS. Please help.