Finding the best retirement strategy: MFs or NPS Tier-2?

Tata Pension Fund CEO Kurian Jose explains what makes NPS Tier-2 an attractive option

- Sashind Ningthoukhongjam

People use mutual funds to plan for all sorts of things: buying a house, car, or even an iPhone. However, when it comes to retirement planning, some investors are choosing the National Pension System (NPS) Tier-2 over mutual funds to build their nest egg. While NPS Tier-1 offers tax benefits, it restricts withdrawal. On the other hand, NPS Tier-2 offers flexible withdrawal options without tax benefits.

For starters, NPS was introduced by the central government in 2004 to overhaul its pension plan by transitioning from the defined benefit plan to a defined contribution plan.

In the former, the government distributed a certain amount as pension periodically after retirement. Post the transition, there is a fixed contribution amount, but the amount to be disbursed depends on the size of the corpus that has accumulated at the time of retirement. It was subsequently opened up for private sector employees in 2009.

Mutual funds in India command an asset base of ₹67 trillion, while the NPS Tier-1 account for an asset base of ₹2.28 trillion, excluding contributions by the state and central government employees. In contrast, NPS Tier-2 accounts for just ₹6,510 crore.

Mint spoke with Tata Pension Fund chief executive officer Kurian Jose to understand what makes the NPS Tier-2 attractive. Edited excerpts:

Some people are investing in the NPS Tier-2 to build a retirement corpus. Why is that?

Investors have broadly three options when it comes to retirement planning. The first is to invest in mutual funds, which invite capital gains tax at the time of redemption. The second option is to invest in NPS Tier-1 and get tax benefits. The NPS Tier-1 falls under the Exempt-Exempt-Exempt, or EEE, category from a taxation perspective. It means that contributions, accumulations, and withdrawals are tax-free.