What is the New Pension Scheme (NPS)?
A defined contribution scheme initially launched for government employees, was extended to all citizens of India by the end of 2009. Under NPS, regular voluntary contributions are made. Investments of the portfolio are managed by professional fund managers. After a minimum lock-in-period of 10 years, partial withdrawal is allowed. On retirement investors receive 60 percent of the corpus amount and the remaining 40 percent has to be compulsorily used for purchase of annuity against which investors receive monthly pensions.
Taxability
Recently, in the Budget 2017, the following proposals were made:-
- Any payment from the NPS Trust to be exempt up to 40 percent of the amount received, either on maturity or on closure of the scheme while the remaining 60 percent will be taxable in the hands of the investor.
- Partial withdrawals to be exempted up to 25 percent of the contribution made by the employee.
BOTH THESE CHANGES TO BE EFFECTIVE FROM 1.4.2017
Also, earlier the deduction allowed u/s 80 CCD was limited to 10 percent of Gross Total Income (GTI) for individuals other than employees. From 1.4.2018, upper limit will be raised to 20 percent of GTI of self-employed.
What is an open-ended mutual fund?
It is a collective investment scheme which can issue and redeem shares at any time. An open-ended fund provides investors an easy low-cost way to pool their money and purchase a diversified portfolio reflecting a specific investment objective, such as growth and income. Investors don’t need a lot of money to gain entry into an open-end fund, making the fund easily accessible for investment. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset value (NAV) which are declared on daily basis. The key feature of an open ended fund is liquidity.
Taxability
An investor opting to exit from an open-ended fund within 12 months of purchase will be subject to Short term capital gain tax @ 15 percent. If he exits post 12 months of purchase, the proceeds in his hands will be tax-free.
Dividend in the hands of the investor will be tax-free.
Difference between a NPS and an open-ended mutual fund:-
| Criteria | NPS | Mutual Fund |
| 1. Liquidity | Illiquid | Highly Liquid |
| 2. Flexibility | Rigid on account of compulsory annuity purchase on withdrawal | Highly Flexible and funds deployment as per investor’s preference. |
| 3. Asset class choice available | Three asset class choices available i.e. E, C & G. | Vast Array of Asset class choices available |
| 4. Cost | Low operational cost | Comparatively high operational cost |
| 5. Maximum Permissible Equity Exposure | 50% | No limits and based on investor’s risk apetite. |
| 6. Maximum Age at Entry | 60 years | No upper age limit |
Considering all of the above facts, investing in an open-ended mutual fund is profitable as compared to investing in a NPS.
Following is a case study to help you understand it better:-
Case Study: Below is a table for an individual at 30 years of age and willing to invest for the next 30 years. There are 2 scenarios.
| Scenario | Invested Amount (per year) | Rate of return | Maturity Amount | Taxability |
| NPS | 50000 | 10% | 9497189 | Taxable |
| MFs Post Tax | 35000 | 12% | 10295582 | Tax Free |
In Scenario 1: If we invests Rs. 50,000 in a year (divided equally over 12 months) in NPS. Since the maximum amount invested in equity through NPS cannot exceed 50% in equity, the average rate of return is assumed at 10% per year.
In Scenario 2, we invest the same amount in Equity Mutual Funds, of course after coughing up 30% tax. So, the investable amount with him is not Rs. 50,000 but only Rs. 35,000. The equity component in case of mutual funds would be 80% plus, hence the average rate of return in this case is assumed at 12%.
In Scenario 1, the maturity amount after 30 years comes to Rs. 95 lac vis-a-vis Rs. 1.03 crores in the non NPS scenario 2. As you can see, this individual ends up with more amount by ignoring the NPS and investing on his own that too after paying 30% tax.
Not to mention, we enjoy great flexibility and liquidity throughout his investment tenure.
Conclusion: Just comparing two products on the features and return probability, it is clearly visible that we should not invest in NPS as on date. It is advisable to pay that extra tax now and enjoy far larger tax-free corpus at the time of retirement.
FlexiCapital 