There is no shortage of intstruments to invest in. NPS aka National Pension Scheme is one such investment that should be on your radar not only for your retirement benefits but also for tax saving purpose. In this article, we have listed down the pros and cons of investing in NPS in India
What is National Pension Scheme (NPS)?
It is a scheme by Central government to provide retirement income to the retirees. The contribution the NPS is tax exempt in India in order to boost retirement savings in India as most people don’t consider retirement savings during their working phase.
It also takes away asset management problem from savers as the funds are regulated by Government appointed Pension Fund Regulatory and Development Authority of India (PFRDA) regulations.
It is open to employees from the public, private and even the unorganised sectors except those from the armed forces.
Source – npstrust.org
Main motives of National Pension Scheme
- To provide citizens of India with long-term financial security.
- To provide retirement income
- Reasonable market-based returns over the long term
Different Types of National Pension Accounts
- Tier 1 account – a mandatory account. It is meant to save for retirement and there are restrictions to withdraw from it before and after retirement
- Tier 2 account – voluntary. It allows free withdrawals.
Asset Allocation Choices
- Active choice – under this one can choose asset allocation according to one’s choice amongst Equity, Corporate Debt, Government Securities, & Alternative Investment Funds.
- Automatic/ default choice – under this choice the asset allocation is done according to age bracket one falls in. In automatic choice, one initially at entry needs choose between any of 3 below & then the allocation & rebalancing is done automatically for the rest of the period for the participant –
- Aggressive – Maximum Equity exposure is 75% up to the age of 35
- Moderate – Maximum Equity exposure is 50% up to the age of 35
- Conservative – Maximum Equity exposure is 25% up to the age of 35
Value of assets under management in NPS
Source – statista
AUM wise – Rajasthan is the leader followed by Madhya Pradesh, Maharashtra, Karnataka & Uttar Pradesh with AUM of 6458.82 cr, 4229.7 cr, 4044.36 cr, 3974.1 cr, & 3786.62 cr respectively.
Asset management companies managing pension funds
|Company name||AUM (in crore)|
|Aditya Birla Sun Life Pension Management Limited.||150|
|HDFC Pension Management Company Limited.||8,265|
|UTI Retirement Solutions Limited.||122,201|
|SBI Pension Funds Private Limited.||160,492|
|ICICI Prudential Pension Funds Management Company Limited.||4,353|
|Reliance Pension Fund.|
|Kotak Mahindra Pension Fund Limited.||991|
|LIC Pension Fund.||121,028|
Source – npstrust.org
Pros of National Pension Scheme
- Low default risk – as the fund is managed by government the default risk is low as default on government liabilities haven’t occurred in past decade for Indian government liabilities.
- Tax benefit – contributions done to this account are eligible for additional tax deduction benefit of up to Rs. 50,000/- under section 80CCD (1B), over and above Rs.1,50,000/- under section 80C for individuals.
- Early withdrawal – if one wants to withdraw before age of 60, one can do but one should meet following conditions –
- Subscriber should be in NPS atleast for 3 years
- Withdrawal amount will not exceed 25% of the contributions made by the Subscriber
- Withdrawal can happen maximum of three times during the entire tenure of subscription.
- Withdrawal is allowed only against the specified reasons (as mentioned on https://www.npscra.nsdl.co.in/all-faq-withdrawal.php)
- Tax free retirement income – 60% of the corpus can be withdrawn immediately post age of 60 which is tax free. The remaining 40% needs to be reinvested with PFRDA registered annuity provider to provide annuity.
- One can allow NPS to stay invested till age of 70 & also contribute till 70.
- Control over assets invested in – one can choose from various available asset allocation & asset managers according to one’s preference allowing to take returns & risk which one is suitable with.
- Low investment management costs – the costs are capped by PFRDA at 0.09% which is lower compared to normal mutual funds charges.
Cons of National Pension Scheme (NPS)
- No returns guarantee – The return under NPS is market driven. The returns generated through investments are accumulated for the pension corpus and is not distributed.
- Not much flexibility in early withdrawal – If one wants to exit before 60 years, you can withdraw only 20 per cent of the corpus. You must buy an annuity with the remaining 80 per cent of the corpus.
- Additional regulations on withdrawal – Maximum three partial withdrawals not exceeding 25 per cent of the total contribution for emergencies. There should be a gap of five years between two withdrawals. The gap is reduced for medical emergencies. A member can make the first partial withdrawal only after 10 years of membership.
- Annuity income taxable – The annuity income one receives annually is taxable. (40% of corpus which was invested for providing annuity is tax free but income one receives from the corpus invested is taxable).
- Investing restrictions – One can’t invest more than 50% of portfolio in NPS.
The NPS is developed with motive to provide retirement income & has imbibed various rules to ensure that one doesn’t succumb to the temptation of withdrawing early to meet one needs from NPS funds.
The past returns look inflation hedging & above that also. But the main catch starts when one starts to look at the choices available for NPS. One needs to first choose amongst automatic or active.
Automatic doesn’t involve much selection relative to active option where one needs to set his allocation, then the fund management company to invest in with.
The returns of various management companies differ which one needs to consider beforehand according to one’s risk-return profile & the corpus one is investing with.
One must consider it as according to survey 42% of Indians don’t have retirement plan as done by financial express. NPS tries to solve the problem for common man in a cost-efficient manner with reasonable rates of returns. It must be a part of one’s retirement plan, as it simplifies & provides financial security.