NPS or National Pension Scheme is a defined contribution scheme introduced by the Government to encourage the people to save and focus on their retirement planning goals.
Is NPS a good long term investment ?
NPS or National Pension Scheme is overall a good step taken by the Government to help individuals of India to plan for attaining their long term objectives and have a regular source of income on their retirement.
Consider the below mentioned important features of NPS that might help you in deciding whether NPS is a good long term investment for you or not.
Important features of NPS :
- Any individual between the age of 18 years to 60 years can open an NPS Account.
- NRIs who are citizens of India are also allowed to open NPS Account.
- PFRDA (Pension Fund Regulatory Authority of India) is the regulating authority for NPS.
- You can open 2 types of accounts in NPS : Tier I and Tier II.But,an active Tier I is compulsory account before opening a Tier II account.
- The minimum annual contribution for NPS Private Sector Tier I is Rs.1000(which was Rs.6000 earlier).
- In case of Tier II Account,no minimum annual contribution and minimum balance requirement is there.
- Tier I is basically a non-withdrawable account while you can withdraw any time from Tier II .
- You can have premature withdrawal subject to certain conditions.
- Through NPS, you invest your money in 3 types of asset classes : E-Equity,C-Corporate debt and G-Government securities.
- You can manage your portfolio yourself known as active choice, or let it be managed by the system automatically based on your age also known as auto choice.
- You can invest maximum 50% in E-equity asset class.
- NPS is of EET nature i.e.investment and returns are tax free but the maturity amount is not fully exempt from tax.(where E stands for Exempt and T for Taxable)
- Only 40% of the total corpus is tax free at the time of maturity. Here is the major point of difference as compared to other long term investment options like Public Provident Fund (PPF) and Sukanya Samriddhi Yojana where the maturity proceeds are tax free completely.
- Another important point to be considered is that unlike other long term investments, in NPS you cannot withdraw the entire corpus at maturity.
- You have to use 40% of the accumulated corpus for buying annuity.You can withdraw only 60% of corpus at maturity.
- The annuity income is also not tax free and shall also be subject to tax as per Individual Income tax slab rates.
- Tax benefit on NPS : You can avail a tax deduction U/s 80CCD(1),80CCD(2)upto Rs.1.5 lakhs. You also get an additional tax deduction of Rs.50000 U/s 80 CCD(1B).
- eNPS facility has been introduced which has further simplified the process of opening an NPS account.You can register and contribute online without any hassles.
Few drawbacks that hold back investors from investing in this scheme are :
- Looking at the very long lockin period as compared to other investment options, the investors hesitate to invest their money in it.
- The maturity proceeds are not fully tax free.This also restrains some investors to put their money in NPS when other tax free options like PPF are available.
- The restriction on investment in equity asset class also refrains young investors who want to earn high returns by taking higher risks.The Government is taking steps and it is quite possible to increase the limit to 75% in equity. PFRDA has decided to include another fund for private sector employees to increase the equity investment portion to 75%(that is presently 50%).
However,amendments are being done from time to time to make NPS or National Pension Scheme a more popular investment scheme in India.Hopefully,it will be made more simplified and attractive to incline the potential investors towards it.
You have gone through all the important features and few drawbacks as well.Decide what is best for you and build a sound financial portfolio.
Do share your valuable feedback ! For any queries thereon,you can ask in the comment section below.
To have detailed information on NPS you must go through : National Pension Scheme or NPS – Your perfect guide !