NPS vs APY

Difference between National Pension Scheme v/s Atal Pension Yojana

Finance Investment

The National Pension Scheme (NPS) and the Atal Pension Yojana (APY), both are investment schemes meant to secure your future. Both of these work hard to make your retirement life free of worries. 

Most of us don’t work actively after our retirements and hence, don’t receive a regular income source. So, even if our income source dries up, we still are faced with lifestyle and medical expenses. To live a financially secure post-retirement life, we need to plan and invest accordingly to create a retirement corpus.

NPS and APY are two such instruments launched by the Government. However, there are certainly some notable differences between the two. Let’s discuss the same to understand them in a better way.

What is meant by NPS Scheme?

National Pension System (NPS) scheme is a type of investment meant to secure your life post-retirement. You can start this scheme any time before you attain 60 years of age. The investment has to continue till your retirement. 

NPS offers 4 types of fund classes and 2 investment strategies. The active choice option requires you to allocate the assets yourself. While the auto choice will have a fund manager allocate the assets on your behalf. 

The returns you receive on your NPS investment depends on the performance of the market-linked securities. NPS allows you to withdraw 60% of the corpus accumulated by the end of the investment. The rest 40% needs to be invested in annuities which in turn will pay you the monthly pensions till the rest of your life.

What is meant by APY Scheme?

The Atal Pension Yojana (APY) is yet another scheme to secure your retirement life financially. This too, like NPS was launched by the Government. The main aim of the Atal Pension Yojana is providing low-income individuals with a monthly pension after they reach 60 years of age. The APY scheme provides you with 5 choices of pension amount in the range of INR 1000 to INR 5000. 

This amount is guaranteed to be paid to you every month post-retirement. Your contribution to the plan depends on the frequency of deposits, chosen pension amount, and your age. Once the plan matures, the guaranteed monthly pension amount will be paid for your and your spouse’s entire lifetime.

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Similarities between NPS and APY

APY and NPS schemes have several similarities for you to consider:

  • Both the National Pension Scheme (NPS) and the Atal Pension Yojana (APY)
  • NPS and APY, both are retirement oriented schemes that help you build a retirement corpus.
  • Both the schemes are regulated by the Pension Fund Regulatory and Development Authority (PFRDA)
  • Both the schemes provide you with a fixed monthly pension after maturity
  • The pension amount is taxable at the rate of your Income Tax slab rates

Detailed Points of Difference between NPS and APY

The two schemes APY and NPS, both have been launched to secure your retirement life. However, there are several differences between NPS and APY. These are all listed below:

Eligibility Criteria

The entry age for the APY scheme is 18 to 40 years. In addition to that, only the Indian residents can apply for the APY scheme. On the other hand, for the NPS scheme, the entry age is 18 to 60 years. Also, both NRIs and Indian residents can take up the NPS scheme.

Contribution

The minimum contribution for APY is INR 42 per month and can grow up to a maximum of INR 7,778 per half-year. The amount you need to contribute depends on your age at the time of account opening. Moreover, the contribution amount also depends on the pension amount you choose and the contribution frequency.

For NPS, if you choose the Tier 1 account, then the minimum contribution is INR 500. From the second year, you need to contribute a minimum of INR 1000. And to keep the account active, you need INR 500 per contribution. 

If you choose to invest in a Tier 2 account, then to open the account, you need to pay INR 1000 per year. Then, a minimum of INR 250 per contribution is needed to keep your account active. There remains an upper limit on the maximum amount you can contribute towards the account.

Pension Amount

The pension amount under the APY scheme is self-chosen. You can choose to receive a monthly pension in the range of INR 1000 to INR 5000 with the APY scheme. While, with the NPS scheme, the pension amount can vary. It depends on a lot of factors like the corpus you invest, the performance of the annuity, etc.

Tax Benefits

Both schemes have almost similar tax benefits. But, NPS is slightly better than APY in this regard. With NPS, an additional tax deduction under Section 80CCD (2) is also allowed. For the APY scheme, only the tax benefits under Sections 80CCD (1) and 80CCD (1B) are available.

Pension Options

APY provides you with a guaranteed pension for your entire lifetime. If the investor dies and the spouse is alive, even then the pension will be paid to the spouse. On the other hand, the NPS scheme offers 7 different annuity options. 

Account Types

APY scheme offers only one account per subscriber. But, an NPS scheme allows you to have 2 types of accounts – Tier 1 (compulsory) and Tier 2 (optional).

Premature Withdrawals

The APY does not allow any partial withdrawals until the maturity of the scheme. The entire corpus of your APY scheme can be withdrawn only if the investor dies or gets diagnosed with a terminal illness. After withdrawal, your APY account will be closed. But, if the investor dies, then the spouse could choose to continue the plan and receive the pension amount throughout her lifetime.

On the other hand, the NPS scheme does allow premature withdrawals. You can withdraw money from a Tier 2 account anytime without any restriction. But, in case of a Tier 1 account, you are faced with restrictions. This is allowed only after you complete three years of investment in NPS. 

Moreover, withdrawal from a Tier 1 account is allowed only for special cases like marriage, education, emergencies, etc. The partial withdrawals up to 25% of the balance are allowed. 

Asset Allocation

There are 4 types of assets you can choose while investing in an NPS. These are called Asset Class A, C, E, and G. While in an APY scheme, your funds are invested in Government securities only and therefore, are completely risk-free. 

Maturity Benefits

The pension amount that you choose with the APY scheme will be paid to you after maturity. On the other hand, an NPS scheme will give you 60% of the entire corpus and the remaining 40% is invested in an annuity. This annuity provides you with the monthly pension payouts. You can also use the entire corpus as your pension.

Government Contribution

The Government contributes 50% of your contribution in case of the APY scheme. The maximum contribution of Government, however, is restricted to INR 1000. But, this facility was promised to people who subscribed to the scheme from June 2015 to December 2015. Also, only the non-tax paying people with no other Statutory Social Security Scheme would receive this facility.

In the case of the NPS scheme, the Government contributes only for the accounts held by Government employees. The govt. contributes 10% of the govt. employee’s salary into the NPS scheme. 

Difference between NPS and APY: At a Glance

Sl. No. Features NPS APY
1. Entry Age 18 to 55 years 18 to 40 years
2. Who can invest Both Indian citizens and NRIs  Only an Indian citizen residing in India
3. Pension  Not guaranteed. Based on your contributions and growth from the market-linked securities. Guaranteed pension of INR 1,000 to INR 5,000 as chosen by you during joining the policy
4. Tax Benefits Tax deduction on the contributions towards the account, up to INR 1.5 lakhs as per Section 80CCD (1). Additional INR 50,000 tax exemption allowed as per Section 80CCD (1B). Tax benefits not provided
5. Premature Withdrawal Partial withdrawals permitted after you have contributed for 3 years into the account. If you have a Tier 2 account, then you can withdraw anytime. 

The premature exit is also allowed and herein 20% of the account balance is paid out and the rest 80% goes into annuities.

Allowed only in cases of death or terminal illness of the subscriber. The entire APY amount will be paid and the scheme gets terminated.
6. Account Type Tier 1 and Tier 2 Only one type of APY account
7. Investment Amount Any amount equal to or greater than the minimum contribution criteria. Can be increased later on. Depends on your age, pension amount, mode of investment. The investment amount is fixed.
8. Govt. Contribution 10% of the individual’s salary + dearness allowance (Only for Government employees) 50% of the subscriber’s contribution or INR 1000 (whichever is lower). Only for subscribers who don’t have a taxable income.
9. Nomination Anyone can be nominated The nominee could be anybody except the spouse
10. Pension payment options 7 pension types to choose from Joint life pension available if the spouse outlives the investor
11. Maturity payout 60% lump sum payout and 40% as annuity payouts The annuity is chosen by the investor
12. Fund portfolio 4 types of asset classes Government securities
13.  Minimum Contribution INR 500 per year INR 42 per month

Final Verdict

Both APY and NPS are beneficial instruments that can help us receive a monthly pension. However, an individual needs to analyse and compare the two schemes to understand which one suits them better. This article aims to serve you the same and hopefully, the difference between NPS and APY is now clear to you.

Let us know your thoughts in the comments below!

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