Pros and Cons of the NPS
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Updated date : 29 January 2019
The NPS, or the National Pension Scheme, is the initiative of the Government of India, and protects the interest of the subscribers through regulations, while offering them higher interest and returns.
NPS of National Pension Scheme is a defined contribution, and voluntary retirement saving scheme. It has been designed to provide for systematic savings, over a long period of working years of the subscriber.
National Pension Scheme Good or Bad
All the savings of the investor are pooled in the pension fund of the investor, in the NPS scheme. Below are some of the advantages, or the “Pros”, of the NPS scheme.
Funds Invested By the Able Fund Managers
All the funds deposited by the subscribers, are invested by the professional, qualified, and experienced fund managers, who are regulated by the PFRDA, or the Pension Fund Regulatory and Development Authority. The funds are invested in accordance with certain approved investment guidelines, in a range of portfolios that comprise the corporate shares and debentures, bills, and the government bonds, among others.
The investments made in the Tier 2 accounts of the NPS scheme, get the higher returns, which accrue over a long period of time, to be substantial in size at the retirement age. The funds that accumulate in the Tier 1 account, also accumulate funds, towards the pension purpose.
Savings in schemes like the EPF grow at a very slow rate, as all of the investments are invested in the debt instruments and the government securities, which often may not even offer returns higher than the inflation rate. A high proportion of NPS investments is channeled towards the equity market, and hence the interest accrued are higher. While the NPS withdrawals (in the form of pension plans and annuity) are taxable, the returns are still much higher in comparison to the EPF.
No Restriction Towards the Frequency of Contributions
The subscriber can deposit money in any of the NPS accounts yearly, half yearly, quarterly, or monthly. He or she can also increase or decrease the account contributions, in a way that the minimum contribution (of Rs 6000) is made.
The Tier 1 account can be opened with a minor investment of Rs 500, while the Tier 2 accounts can be opened with a minor investment of Rs 1000. The amount can be deposited through check, cash, or demand draft.
A person can easily enter the scheme, at multiple avenues. He or she only needs to fill the NPS form, and submit the identity and address proof.
Wide Coverage and Bigger Canvas
All citizens of India, and also the NRIs, can invest in the scheme. It has a vast age span, which ranges from 18 years to 60 years (as it is a pension scheme). Initially, it was only for the "Government of India" employees, but later (from the year 2009 onwards) anybody, including the freelancers, self employed people, and the business men, can invest in the scheme.
Note: As per the latest amendment to the NPS scheme, subscribers can modify the withdrawal age to be more than 60 years, so that it does not crosses 70 years. As more and more people are today working beyond 60 years, the NPS wishes to accommodate to the latest job and working trends.
Regulations that Safeguard the Investments
All investments of the NPS scheme are secured through regulations, and hence the subscribers enjoy better returns, which are also safeguarded.
The scheme is easily available, and one can easily subscribe to it by reaching nearby public sector or private sector banks.
Multiple Funds of NPS
NPS has 3 funds in store for the subscribers. These include:
- The corporate funds
- The equities
- The government securities
A subscriber can invest up to 100%, in the government securities fund and the corporate bonds. The investments are done according to:
- Active choice: Where the subscriber can choose where he or she wishes to invest the money.
- Auto choice: When the investments are done by the fund manager, according to the age of the investor.
Tax Benefits Related to the NPS
Investments in NPS are crowned with a number of income tax related exemptions.
Section 80 CCD-1
An exemption of Rs 1.5 lakhs or less.
Section 80 CCD-2
An exemption of the 10% of the basic salary, which has been invested towards NPS by the employer
Section 80 CCD-1B
An exemptions of up to Rs 50, 000, towards voluntary contributions into the NPS scheme
These exemptions are provided over and above the exemptions provided in the Section 80 C.
A Very Cheap Plan
NPS is one of the cheapest pension plans in the whole world. It has a “one time” enrollment fee of Rs 125. The fee is 0.25%, for each financial transaction, the minimum and maximum limits being Rs 20 and Rs 25000, respectively. The account opening charges are Rs 50, and the annual maintenance charges are Rs 190. At 0.01%, the scheme also has the lowest fund management charge. The NPS scheme returns, on the contrary, are quite large.
Easy Maintenance of The Account
When you invest in the NPS, you are allotted your own Permanent Retirement Account Number (PRAN), through your CRA or the Central Record Keeping Agency. You also get an internet password and id, and can do the transactions online also. The systematic pension investment plan provides for easy investments, and helps the retired and old age people to make the monetary transactions will least of efforts.
Option of Opening Multiple Accounts
An investor can open both, the pension account (Tier 1, which is mandatory), and the investment account (Tier 2, which is optional), when he or she subscribes to the NPS. A single scheme, hence, provides multiple investment avenues.
While withdrawals from the pension account have restrictions, any amount can be anytime withdrawn out of the investment (Tier 2) account, which makes the scheme even more lucrative.
Option to Change the Fund Manager
The subscribers even get the option to change their fund manager.
Disadvantages or Cons of the NPS
The NPS scheme has its own set of cons or disadvantages, when we compare it to the other investment/pension options available.
Lesser Benefits (For the Government Employees) than the Earlier Pensions Schemes
The NPS scheme was created by the Government of India, in order to stop all the defined pension related benefits that it gave to its employees.
NPS restricts all kinds of withdrawals, before the subscriber reaches the age of 60 years. The subscriber can make the first withdrawal from NPS, after 10 years of opening the account, and a total of 3 withdrawals, till he or she reaches the age of 60 years.
The withdrawal cannot be more than the total sum of all the contributions made by the subscriber. The contributions that are made by the employer towards the employees NPS fund, are not termed as the investment of the subscriber.
Taxation at the Time of Withdrawal
The NPS corpus, which the subscriber can use for buying annuity or for drawing pensions, is taxable, when the schemes matures. 60% of the investment in the NPS is taxed upon by the Government of India, while 40% escapes taxation.
Other products, including the Public Provident Fund, and the EPF, among others, are not taxed at maturity. You can also invest in the mutual funds (equity), whose returns are not taxed at the time of maturity, and offer much greater returns.
Account Opening Restrictions
A person can maintain a single NPS account, in his or her lifetime. While the PRAN can be easily ported across the geography and jobs, 1 single individual will get a single PRAN.
The subscriber cannot invest more than 50% of his or her total investment in the NPS account, towards the equities.
No Guaranteed Returns
While NPS is a government scheme, the corpus is created according to the returns, which are generated under the corporate bonds, government securities, and the equity. Hence, the market fluctuations can affect the returns/gains adversely.
Complexity towards Choosing the Fund Manager
Many people are not aware of the financial terms relating to equities, debt, securities and others. Hence they fail to choose the right fund manager for their NPS investments.
These are the advantages and disadvantages of National Pension Scheme. On a whole, the scheme is more secure than other high return options (including the mutual funds). Those who have a low risk appetite, but want higher returns on the investments (more than the PPF, EPF and other similar schemes), should opt for the NPS scheme, and invest more in the Tier 2 account of it, while maintaining the Tier 1 account.
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