Funding day-to-day lifestyle costs after retirement could turn out to be very difficult. But that is unless you have a retirement fund all set up for you. We have to face the fact that everybody doesn’t have a Government job that will provide them with a pension after retirement. And hence, the need to invest in pension plans.
The National Pension Scheme (NPS) and LIC Pension Yojana (LPY) are two of the most pension schemes in India. In this article, we will discuss the differences between the two in detail.
What is the National Pension Scheme (NPS)?
National Pension Scheme (NPS) is a pension plan launched by the government to provide individuals with monthly pension payouts. Everybody including Government employees, private-sector employees, and self-employed individuals can take up this plan.
In NPS scheme, the subscriber needs to make contributions to their pension accounts. These contributions put in several market-linked tools to grow your corpus. So, the final pension amount varies as per the performance of these instruments.
The interest rate is variable too and ranges from 9% to 12%. This scheme can opt by individuals in the age range of 18 to 60 years. After opening an NPS account, you need to stay invested in it until you attain 60 years of age.
What is the Pradhan Mantri Vaya Vandana Yojana (PMVVY) / LPY?
Pradhan Mantri Vaya Vandana Yojana is a government-backed pension scheme provided by LIC. This scheme was launched in 2017 and promises to provide its customers with a fixed monthly pension. And to receive the same you need to stay invested in the policy for at least 10 years.
The investment made in this policy could range from INR 1.5 lakh to INR 15 lakhs to receive a monthly pension ranging from INR 1,000 to INR 10,000 respectively. You could opt for monthly, half-yearly, quarterly, or yearly pension payout.
Note: After some modifications made by LIC, PMVVY will now provide a fixed interest rate of 7.40% p.a. from the financial year of 2021. Also, the last date for application is 31st March 2023.
NPS Vs LPY
| Sl. No. | Features | National Pension Scheme (NPS) | Pradhan Mantri Vaya Vandana Yojana (PMVVY) / LIC Pension Yojana |
| 1. | Maturity Amount | Not fixed | Guaranteed return |
| 2. | Eligibility Criteria | Indian Citizens and NRIs | Indian Citizens |
| 3. | Entry Age | 18 to 60 years | >60 years, No upper limit |
| 4. | Investment Amount | Min.: INR 500 per contribution and INR 1000 per year
Max: No upper limit |
INR 1.5 lakh to INR 15 lakhs |
| 5. | Pension Amount | Variable | INR 1,000 to INR 10,000 |
| 6. | Policy Tenure | Up to 60 years of age (retirement) | 10 years (minimum) |
| 7. | Rate of Interest | 9% to 12% (Variable) | 7.40% p.a. for FY 2021 (Fixed) |
| 8. | Loan Facility | Can’t take a loan against NPS | Can take a loan against LPY. |
| 9. | Management Fee | Low (0.25% approx.) | High (Around 1%) |
| 10. | Tax Benefits | Tax deduction allowed as per the Section 80CCD and Section 80C (Up to INR 2 lakhs per year) | Tax deduction allowed as per the Section 80C (Up to INR 1.5 lakh p.a.) |
| 11. | Annuity | You must buy an annuity with at least 40% of the matured corpus | You must buy an annuity but it should be from LIC only. |
| 12. | Premature Withdrawal | Only 20% can be withdrawn before maturity. Rest 80% is used to buy an annuity. | 98% refunded |
Points of Difference between NPS and LPY
1. Eligibility Criteria
The Pradhan Mantri Vaya Vandana Yojana is meant to serve the senior citizens. So, applicants must be aged more than 60. And the policy doesn’t have a maximum entry age. On the other hand, the entry age for an NPS plan lies in the range of 18 to 60 years.
Another point of difference is that both Indian citizens as well as NRIs can open an NPS account. But, PMVVY is only for Indian citizens.
2. Pension Rate
The PMVYY provides monthly pension payments at the rate of 7.40% p.a. for the first year of the policy. While the pension rate of NPS is not fixed. The NPS matures when you attain 60 years of age. And after that, at least 40% of the corpus needs to be invested in an annuity. Now, your pension rate depends on how well the annuity performs in the market. So, the pension rate provided by NPS is variable.
3. Pension Amount
The minimum pension amount you will receive with LPY is INR 1000 per month. And the maximum pension under this scheme is INR 10,000. But with NPS, there is no guaranteed amount that you will receive.
The amount of your monthly pension from NPS depends on the performance of the annuity you have chosen. If the annuity performs well enough, then you might receive a hefty amount as pension. But, if the opposite happens, then your pension amount could be way low than what you expected.
4. Investment Amount
You can open an NPS account with just INR 100. And the least contribution you need to make towards it is INR 1,000 per year. But, the minimum amount for every contribution is INR 500 and there is no maximum limit.
The maximum investment amount in a PMVVY could be up to INR 15 lakhs. And the minimum investment to receive a monthly payout of INR 1,000 is INR 1.5 lakhs.
5. Policy Tenure
You can subscribe to NPS at any time from 18 to 60 years of age. But, you cannot avail of the maturity corpus until you reach the retirement age, i.e. 60 years.
PMVVY can be taken up by senior citizens only. And the policy tenure needs to be at least 10 years.
6. Tax Benefits
PMVVY offers tax deduction as under Section 80C of the IT Act, 1961. This means that you can claim a tax deduction of up to INR 1.5 lakh in a fiscal year. But, the interest earned is not tax-exempt.
On the other hand, the contributions you make towards an NPS scheme are tax exempted as per the Section 80C and the Section 80CCD. This allows you to claim a total tax deduction of INR 2 lakhs on your NPS contributions. The maturity
7. Loan Facility
NPS doesn’t offer any sort of loan facility. This means that you cannot take up a loan against your NPS scheme.
PMVVY offers the loan facility after you have completed 3 years with the policy. The maximum amount of loan that you can take up through this is 75% of the policy price.
Note: The rate of interest on all loans approved till April 2021 is 9.5% p.a.
8. Premature Exit
You can opt for a premature exit in an LPY but 98% of the purchase amount will be paid out to you. Also, this can be done only in cases of serious emergencies like critical illness or accident.
Premature Exit can be done for NPS Tier 1 account only after the subscriber has completed 3 years with it. Such a situation permits you to withdraw only 20% of the corpus and invest the remaining 80% in an annuity. Also, the premature exit can be permitted for NPS only for reasons like higher education, marriage, terminal illness, and so on.
Furthermore, keep in mind that there are no withdrawal restrictions imposed on NPS Tier 2 accounts.
NPS Vs LPY: Final Verdict
The Pradhan Mantri Vaya Vandana Yojana is best for all the retired individuals. Senior citizens seeking regular income source without any fluctuations in the interest rate will prefer LPY. On the other hand, NPS is far better suited to the younger generation.
We hope you find this comparison article helpful. Let us know if we missed out any points in the comments below!
