NPS scores on returns

With the Pension Fund Regulatory and Development Authority (PFRDA) trying to push the National Pension System (NPS) aggressively, employees and even professionals have a good option to save for their retirement. However, the decision to invest or not boils down to three parameters - returns, taxation and regulations around withdrawal.

NPS seems to be scoring the returns' front. If you look at the performance of the top three schemes in Tier-I category and compare these to the category average of other mutual funds, NPS has fared better in most cases. The long-term return (five years) for Tier-I NPS equity funds is upward of 14.7 per cent. The average returns from large-cap mutual funds is 13.4 per cent.

In government bond plans, the NPS has returns of about 11 per cent, whereas long and medium term gilt funds category average is 9.9 per cent. When it comes to corporate bonds, there are no comparable schemes in the mutual funds. But if you look at five-year returns of credit opportunities (9.5 per cent), income (9.1 per cent), and dynamic bond funds (9.8 per cent), NPS is still better off with the top three funds returning over 12.5 per cent. The performance of your portfolio, will differ depending on allocation and the fund manager you have chosen. There are now six fund managers in each scheme.

While the returns are attractive, investors would be more than a tad disappointed with the taxation and regulations around withdrawal. Here, the employee provident fund scores better than NPS.

In NPS, it's mandatory for a retiree to buy an annuity with 40 per cent of the corpus. If you withdraw 60 per cent of the money, it will be partially taxed - that is, 20 per of the original corpus will be added to the investor's income and taxed in line with the prevailing slab. Such restrictions don't exist in the employee provident fund.