Planning for retirement requires careful consideration and strategic decision-making. With a range of options available, navigating the best financial instruments can be daunting especially when it comes to choosing between the National Pension System (NPS) and pension plans offered by insurance companies in India. Because which one holds the key to a secure and prosperous retirement? In this article, we delve deep into retirement planning to unravel the differences between NPS and pension plans from insurance companies. Let’s analyze their features, benefits, and drawbacks to help you determine which option aligns best with your financial goals and aspirations.
What is the NPS Scheme?
The National Pension Scheme (NPS) in India is a voluntary, long-term retirement savings scheme. It is designed to provide a pension or lump sum withdrawal upon retirement to Indian citizens. The scheme was launched in 2004 for government employees and subsequently extended to all citizens in 2009. The NPS operates on a defined contribution basis, wherein the eventual pension amount is determined by the contributions made by the individual subscriber and the returns generated on those contributions.
How Does NPS Work?
The National Pension System (NPS) operates as a voluntary, defined contribution retirement savings scheme. Here’s how it works:
Enrollment:
Any Indian citizen, whether employed in the public, private, or unorganized sectors, can enroll in the NPS. Applicant should be between 18 to 70 years of age as of the date of submission of application and should adhere to the KYC norms prescribed. Enrollment can be done through authorized Points of Presence (PoPs), which include banks, financial institutions, and other entities registered with the Pension Fund Regulatory and Development Authority (PFRDA).
Tier Structure:
- Tier I Account: This is the mandatory, non-withdrawable retirement savings account. Contributions made to this account are locked in until retirement, subject to certain conditions. Withdrawals are allowed only upon reaching retirement age, and a portion of the accumulated corpus can be withdrawn as a lump sum, while the remaining amount must be used to purchase an annuity to provide a regular pension.
- Tier II Account: This is an optional, withdrawable account that offers more withdrawal flexibility. Subscribers can open a Tier II account only if they have an active Tier I account. Funds in Tier II accounts can be withdrawn at any time without any restrictions.
Contributions:
Subscribers contribute to their NPS accounts regularly. These contributions can be made either through the employer (if the subscriber is employed) or directly by the subscriber through various modes such as online banking, cash, local cheque, demand draft or Electronic Clearing System (ECS) at designated PoPs.
| Particulars |
Tier 1 |
Tier 1 |
| Minimum Contribution needed when opening an account |
Rs. 500 |
Rs. 1000 |
| Minimum Subsequent Contribution amount needed |
Rs. 500 |
Rs. 250 |
| Minimum contribution required per year |
Rs. 1000 |
- |
| Minimum number of contributions required in a year |
1 |
- |
Investment Options:
NPS offers subscribers the choice of various investment options, including equity (E), corporate bonds (C), government securities (G), and alternative investment funds (A). Subscribers can allocate their contributions among these asset classes based on their risk appetite and financial goals. The investment portfolio is managed by Pension Fund Managers (PFMs) appointed by the PFRDA.
Accumulation Phase:
During the accumulation phase, contributions made by the subscriber, along with the returns generated on those contributions, accumulate in the NPS account. The accumulated corpus grows over time based on the performance of the chosen investment options.
Retirement Phase:
Upon reaching retirement age (currently 60 years), subscribers can initiate the withdrawal process from their Tier I account. They have the option to withdraw a portion of the accumulated corpus as a lump sum, and the remaining amount must be used to purchase an annuity to provide a regular pension income. Subscribers can also opt for a deferred withdrawal if they wish to postpone receiving pension payments.
Tax Benefits:
Tax Benefits to Employee:-
| Employee’s Contribution |
Eligible for tax deduction up to 10% of Salary (Basic + DA) under Section 80 CCD(1) within the overall ceiling of Rs. 1.5 lakhs under Section 80 CCE of the Income Tax Act, 1961. |
| Employer’s Contribution |
The employee is eligible for tax deduction up to 10% of Salary (Basic + DA) contributed by the employer under Section 80 CCD(2) over and above the limit of Rs. 1.5 lakhs provided under Section 80 CCE of the Income Tax Act, 1961. |
Tax Benefits for Self-employed:-
Qualified for a tax deduction of up to 10% of gross income under Section 80 CCD (1), within the total limit of Rs. 1.50 lakhs under Section 80 CCE. Subscribers are permitted an additional deduction, beyond that allowed under Section 80 CCD (1) for extra contributions to their NPS account, with a maximum investment cap of Rs. 50,000 under Section 80 CCD 1(B).
What is a Pension Plan in Insurance?
A pension plan in insurance, also known as a retirement plan, is a financial product designed to help individuals build a corpus during their working years to secure a steady income stream during retirement. In India, pension plans offered by insurance companies serve as a means for individuals to systematically save for retirement while also providing financial protection to their families in case of unforeseen events.
How Pension Plans Work?
Pension plans work by providing individuals with a systematic way to save for retirement and receive a steady income stream during their post-working years. Here’s how pension plans typically work:
Enrollment:
Individuals enroll in a pension plan offered by an insurance company or other platforms like PolicyBachat. Enrollment may involve comparing life insurance plans and completing an application form.
Contribution:
Policyholders make regular contributions or premiums towards their pension plan. These contributions can be made on a monthly, quarterly, half-yearly, or annual basis, depending on the terms of the plan. The amount of contribution may vary based on factors such as the policyholder’s age, income, and desired retirement corpus.
Accumulation Phase:
During the accumulation phase, contributions made by the policyholder, along with any accrued interest or investment returns, accumulate over time to build a retirement corpus. The pension plan may offer various investment options, such as equity funds, debt funds, or a combination of both, allowing policyholders to choose based on risk tolerance and financial goals.
Vesting Age:
The vesting age is the age at which the policyholder starts receiving the pension or annuity payments. In most pension plans, the vesting age is set at 55 years, but policyholders have the flexibility to choose a later age if desired.
Pension Options:
Upon reaching the vesting age, policyholders have the option to choose from various pension options to receive a regular income stream. These options may include:
- Life Annuity: Payments are made until the death of the policyholder.
- Joint Life Annuity: Payments continue until the death of the policyholder and their spouse.
Tax Benefits:
Contributions made towards pension plans are eligible for tax benefits under Section 80CCC of the Income Tax Act 1961, subject to certain limits. Additionally, the annuity or pension income received during retirement may be partially taxable based on prevailing tax laws.
Death Benefit:
Many pension plans offer a death benefit, where in the event of the policyholder’s demise during the accumulation phase, a lump sum or predetermined amount is paid to the nominee or beneficiary.
NPS Vs Pension Plans from Insurance Companies Comparison
| Factor |
National Pension System(NPS) |
Pension Plans from Insurance Companies |
| Structure |
Government-sponsored retirement savings scheme |
Offered by insurance companies as retirement products |
| Regulator |
Pension Fund Regulatory and Development Authority (PFRDA) |
Insurance Regulatory and Development Authority of India (IRDAI) |
| Eligibility |
For all Indian citizens |
For all Indian citizens |
| Investment Options |
Choice of asset classes including equity, corporate bonds, government securities, and alternative investment funds (AIFs) |
Offer a range of investment options such as equity funds, debt funds, and hybrid funds. |
| Tax Benefits |
Contributions eligible for tax benefits under Section 80CCD, with an additional deduction for contributions up to Rs. 50,000 under Section 80CCD(1B) |
Contributions eligible for tax benefits under Section 80CCC, with tax-free accumulation and partial taxation of annuity income |
| Pension Options |
Annuity options available at retirement |
Annuity options available at retirement |
| Management Charges |
Low management charges |
Management charges vary by insurance company |
| Death Benefit |
It offers a death benefit in Tier I account |
It offers a death benefit during the accumulation phase |
| Vesting Age |
Minimum vesting age set at 60 years |
Varies by plan, usually between 55 to 60 years |
| Withdrawal Flexibility |
Limited withdrawal options during the accumulation phase |
May offer more flexible withdrawal options during the accumulation phase |
| Flexibility in Contributions |
Flexible contribution amounts and frequency |
Flexible contribution amounts and frequency |
NPS Vs Other Pension Plans – Which is Better?
When comparing the National Pension System (NPS) with other pension plans offered by insurance companies, the choice depends on personal preferences and financial goals. NPS stands out for its government-backed structure, offering a wide range of investment options, low management charges, and portability across employers. It provides flexibility in contributions and tax benefits, including additional deductions.
On the other hand, pension plans from insurance companies may offer more diverse annuity options, flexible withdrawal features, and tailored investment strategies. The decision between NPS and other pension plans ultimately depends on factors such as risk tolerance, investment preferences, desired retirement lifestyle, and the need for portability and tax benefits. Therefore, individuals should carefully evaluate their options and consider comparing plans online to determine which retirement savings avenue aligns best with their long-term financial goals.
Also Read: Best Investment Plan for Retirement