National Pension Scheme Vs Pension Fund Which one is better

investing through NPS can get good returns. NPS is a market-linked investment scheme, which means that the returns are linked to the performance of the underlying assets. You can choose your asset allocation, which allows you to invest in equity, corporate bonds, government bonds, and alternative assets.

NPS scheme 

What is better than NPS

A question that many have been asking for days is whether NPS is better or pension fund is better. Non-pensionable, salaried private sector workers know the importance of investment well. Many people worry about post-retirement expenses and how to manage them. Some people are very confused about what exactly investments are. Many people do not understand where the National Pension Scheme (NPS) and pension funds are most beneficial.

NPS follows asset allocation based approach. It offers subscribers a choice of two Investment Tips – Active and Auto. You can do asset allocation as per your choice. In this, you can choose how much to invest in equity, corporate bonds and government bonds. At the same time, Lifecycle Funds can be selected in auto mode. 

Here your asset mix will automatically keep changing. For investors, there are 3 life cycle funds aggressive, moderate and conservative. Unlike NPS, not all reinvestment funds have a built-in asset allocation system.

Earlier, pension funds came in a hybrid form. But there is no flexibility to change the asset mix. Only new pension funds have come in 3-4 categories or schemes covering different investor profiles. Each scheme follows a different asset mix and the investor can choose one according to his needs. The investor can switch between plans as per his choice or opt for auto switch even during the initial five-year lock-in period.

In NPS, investors can invest a maximum of 75 percent of their money in equity. Whereas in a pension fund, under an equity scheme, you can put 100 percent of the money in equity. Yet NPS outperforms pension funds in asset allocation. 

There are two reasons for this. 

First, there is no capital gains tax every time you switch under NPS. Whereas, in pension funds, the investor has to pay tax on any capital gain on every conversion. 

Second, NPS now offers more flexibility to investors by choosing different fund managers for each asset class. This allows us to choose the best fund manager for each asset class and change fund managers once a year. Investors in pension funds are stuck with a single fund manager, despite theoretically choosing from multiple pension funds.

In this way NPS is considered profitable here.

In NPS accounts, a subscriber can withdraw up to 25% of his contribution for specified reasons. If he completes 25 years of service, he can withdraw up to 50%. A subscriber can make partial withdrawal up to a maximum of three times during his entire tenure in NPS. After completion of five years he can withdraw a maximum of 20% of the total corpus.

At the same time, pension funds will allow full withdrawal after a mandatory lock-in period of five years or on retirement, whichever is earlier. Apart from lump sum withdrawal, pension funds allow investors to set up a Systematic Withdrawal Plan (SWP) during retirement so that they can access cash flow according to their needs.

It makes pension fund better in terms of withdrawal and liquidity

Contributions to pension mutual funds started in recent years are not eligible for deduction under section 80C. This was the case in previous projects. Capital gains are taxed on withdrawal. It depends on the tax plan (equity oriented or non-equity oriented). At the same time, up to 60% of the total NPS corpus withdrawn at retirement is tax exempt. Appropriate tax is levied on the income earned as pension from the annuity portion. Additionally, contributions to NPS are eligible for tax deduction in three different ways. NPS investments are eligible for exemption under section 80CCD(1), under section 80C up to Rs. There is a total limit of 1.5 lakhs.

In this way, NPS emerges as profitable in terms of tax benefits.

Invest regularly. Although you can only invest a small amount each month, it will add up over time.

Balance your portfolio regularly. As your age and risk appetite change, you'll need to rebalance your portfolio to make sure it still meets your needs.

Note that NPS is a long-term investment scheme. You should not invest in NPS if you need your money in short term.