National Pension Scheme (NPS) – Pros and Cons

Pension facility is one of the major support for daily needs and expenses of the elderly after retirement. But unfortunately, a large chunk of people employed in private jobs do not have any access to employer provided pension facility.

Even government jobs are also doing away with pension schemes. In this scenario it becomes imperative to save and invest money in the working life over a long period of time so that an individual can live a happy retired life and does not become dependent on anyone for money, this is more important in the view of high retail and medical inflation.

In the absence of employer provided pension facility there is a great need of annuity and pension plans so that people can invest therein. Public and private life insurance companies have thus come up with a variety of pension and annuity plans which gives a lot of flexibility and certainty to subscribers.

The government of India also realizing this dire need has come up with National pension scheme to give an option to invest in their working life over a period of time and reap benefits in retired life. In this article we will first give an overview of what actually the scheme and will list out its 5 pros and cons each so that the investor can make informed choices and get benefitted from the scheme.

National pension scheme is a government sponsored scheme which was started in 2004 first for the government employees and was opened later in 2009 for everyone. Every citizen of India is eligible for this scheme who is of age 18 to 60 years and comply with know your customer (KYC) norms.

The account can be opened with any of the POP (Point of presence) which are most of the banks, public as well as private. The enrollment can be done online with the bank in which you have account by filling up some details in the subscriber registration form. After successful subscription each investor is granted a permanent retirement account number called as PRAN. There are two types of account which can be opened namely tier 1 and tier 2 account.

Pros:

  • Tax deduction up to 1.5 Lacs under Section 80 CCD1 of Income tax act. In addition to this a benefit of 50k is given under section CCD 1B towards voluntary contribution to the scheme. Also as per section 80 CCD2 exemption of 10% basic salary is allowed which has invested into the scheme by the employer.
  • There is a choice of investment from equity or debt. Thus a person as per his risk appetite and future goals can select between the two and can even make a mix of them. In the auto mode the fund manager will create the portfolio for you. This is diversification across classes which the scheme is providing for its investors.
  • If you choose the auto mode instead of the active mode the funds will be invested by highly experienced personnel of the fund managers. Many people who don’t have the requisite skills to choose the optimum investment and build a suitable portfolio can get benefitted from the skills of fund managers to generate higher returns.
  • Although the government do not makes any contribution to the pension scheme, NPS is cheap, allows low investments, has a wide coverage with regulations that safeguard the investment and has easy access to every citizen of India who wants to invest for retirement.
  • The amount of deposit which an individual has to make in the tier 1 and tier 2 accounts are not very high. Also if the account is freezed in wake of non-deposit of the minimum mandatory amount, it can be easily re-activated by paying a very minimum charge. This is better than other annuity and retirement plans offered by insurers where you need to compulsorily pay the premium and in case of missing the same the policy may lapse and also you may be forfeited from benefits under the policy.

Cons:

  • On maturity, that is on attaining 60 years the investor can only withdraw 60% of the fund which will be tax free. The other 40% should be mandatorily invested in an annuity, which is taxable as per the annuity proceeds. The investor is free to withdraw entire money from tier 2 account.
  • No guarantee on returns as the investment of the funds depends on market linked instruments like equity, there is actually no assurance on the returns the investment will generate.
  • There is a 50 – 75% restriction on the investment on equity as per this scheme. Some find it highly restrictive. Especially young and aggressive investors who find equity markets a good option to generate greater returns in shorter time.
  • There is no withdrawal allowed till the investor attains the age of 60. After attaining this age, there are three partial withdrawals allowed from tier 1 account in the life time with some rules. Before attaining 60 years of age the investor can withdraw first time after three years the account is opened and the second and the third withdrawal can be made anytime thereafter.
  • Many people find it difficult to choose the fund manager as they are non-much well versed with financial literacy. They find the process difficult and don’t consider it a good option. Rather they prefer buying an annuity plan from an insurer of reputation like Life Insurance Corporation of India.

 

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