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Saturday, March 26, 2016

National Pension System

National Pension System is the pension scheme for citizen of India (18-60 years) which is considerably more reasonable even though less known to people. Introduced by Pension Fund Regulatory & Development Authority (PRDA), NPS is the least expensive market linked pension plan in comparison to other pension plans but still its sale is not that good as due to less or little commission to agents, therefore it is not endorsed by them.  However, it is accepted by the government.

Now, for you to understand this scheme better so that it becomes easy for you to compare pension plans and decide if NPS will actually suits you need, we have dedicated this whole article to NPS.




Categories of National Pension System (On Basis of Account)

It is categories in two-

  1. Tier-I Account – This is the primary retirement account which has certain restrictions


  • You are allowed to take out only 20% of the money from account while remaining 80% of money left should be used to purchase other pension policies before you hit 60.
  • Even after you turn 60 years of old that is your retirement age, then too you can only withdraw 60% of your money from account while rest money should be spent on buying pension policies.


  1. Tier-II Account– This gives you more control over policy as you can withdraw money as much as you want.



Cost Comparison of NPS 




The above figures shows that money spent on NPS retirement plan is far less than money spent on Mutual Funds and ULIP retirement plan as you need to pay just 0.25% of investment to the agent.


Merits of NPS

  • Tax Benefits- The Finance Bill 2011-2012 allows deducting tax on payment up to 10% of the primary salary and DA created by the boss towards the employee's NPS account. It is only valid if the payment is given by the employer or boss. It is biggest reason of business organization accepting NPS wholeheartedly.


  • Less Expensive– The cost of NPS plan is so less in comparison to other retirement plans. The fund manager (a person or a company that makes decision regarding selection of investment on basis of the fund's objective) charges only 0.25% of investment which is way to less than fee charged by agents of other pension policies.

Demerits of NPS

  • Tax on Maturity Continues– The biggest demerit of this scheme is that you have to pay tax at time of withdrawing money.  You can take out only 60% of money even when you retire and have to buy pension plans from remaining amount; however the tax is charged on the returns you receive.
  • Low on Equity–  People who are young can face loss buying NPS plan as it exposes you to more than 50% of equity share and the returns  of shares is just 12% to 15 % a year. In comparison of this other retirement policy schemes avoid to invest on stock market.


  • Compulsory Annuity– There is also restriction of you taking out money. The Tier-I account allows you to withdraw only 20% before retirement and 60% after retirement while rest should be spent on buying other retirement insurance plan.

Moreover, you can buy annuity also from those companies that are given permission by PFRDA (Kotak, ICICI, SBI, Reliance, Mahindra etc) and there also LIC tops with 70% share of market.

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