The National Pension Scheme primarily aims at benefiting the employees of private and semi-government organisations. The ones in government sectors were liable to a pension after the retiring age. But the same did not stand for private and semi-government employees. Under the administration of PFRDA (Pension Fund Regulatory And Development Authority), the New Pension Scheme under National Pension Scheme was introduced. This provides annuitized returns to private and semi-government employees on the basis of their application for an NPS account.
Benefits of NPS (National Pension Scheme)
NPS is an investment scheme that should be given value. For an employee of a private firm, NPS has multiple benefits:
- Low Investment Cost: The minimum amount to maintain a Tier-1 account is INR 6000 which makes a minimum INR 500 monthly. Thus the initial principal amount is very less.
- Tax Benefit Under Section 80C: If an individual invests in a Tier-1 account, he is liable to tax deductions under section 80C of the Tax Framework. Under the new budget, an additional tax exemption of INR 50,000 will be provided for investing in NPS. Apart from that, the usual benefit states that 10% of the salary invested in NPS will stand for the deductions up to 1.5lakhs. Thus a total deduction of taxes is 2lakhs.
- Flexibility: Opening a Tier-1 account was risky if a case of emergency occurred. This is because the withdrawal of the amount before maturity was taxable. The new flexible NPS states that after retirement 40% of the funds in NPS can be withdrawn without taxation. The remaining 60% will become annuitized for returns.
- Diversity: NPS provides many diverse investment schemes in the form of EGC investments. E is Equity Investment, G is Government Bonds and C is Constant or Fixed Return Investments. An individual when investing can diversify the principal funds among these three options as per their needs.
Drawbacks of National Pension Scheme
- Lower Returns Than Other Equities: The Equity Scheme under NPS is comparatively less profitable than the rest of the market. Equity Investment is an investment in stocks that generates returns on the basis of dividends. Thus the return rate is much higher in the market.
- Withdrawal Is Restricted: The amount invested amount is taxable on withdrawal. Even after the retiring 40% funds withdrawn is not taxable. While it is not a very big disadvantage considering normal situations, but in a case of a risky scenario, this can become very disadvantageous.
- Low Return Rates On Annuitized Amounts: For being liable to a monthly pension after retirement, a minimum of 40% of the maturity amount needs to be contributed to annuity investments. But the return rates of these investments are very low as compared to other investment schemes.
Is NPS A Good Investment Plan?
In the light of benefits provided by Mutual Funds and Employee Provident Funds (EPF), NPS is not very attractive given its low return rates on annuity investments and the withdrawal policy. To secure their retirement with annuitized funds from the government, then investments should be made in the diverse schemes, EGC. Maximal profit returns from investments can be gained by contributing to a variety of schemes together like NPS, Mutual Funds and EPF. This will help reap benefits from all and excellent returns both in terms of tax deductions and maturity amount.