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Sunday, March 3, 2024

What is NPS and why should you invest in it?

NPS or National Pension System is a voluntary, defined contribution retirement savings scheme that aims to provide old age income security to its subscribers. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which was established in 2003.

NPS allows you to invest in various asset classes such as equities, corporate bonds, government securities and alternative investments. You can choose your own fund manager and asset allocation as per your risk appetite and investment horizon. You can also switch between different funds and schemes within NPS.

NPS has several benefits for investors, such as:

  • Tax benefits: You can claim deduction up to Rs 1.5 lakh under Section 80C of the Income Tax Act for your contributions to NPS. You can also claim an additional deduction of Rs 50,000 under Section 80CCD(1B) for NPS. Moreover, the returns from NPS are exempt from tax until withdrawal.
  • Low cost: NPS charges a very low fund management fee of 0.01% per annum, which is one of the lowest in the world. The other charges such as account opening, administration and transaction charges are also nominal.
  • Flexibility: You can open an NPS account online or offline with any of the registered intermediaries such as banks, post offices, retirement planners etc. You can also contribute to your NPS account through various modes such as cheque, online transfer, debit card, credit card etc. You can also change your fund manager, asset allocation and scheme preference at any time.
  • Portability: You can transfer your NPS account from one employer to another or from one sector to another without any hassle. You can also continue your NPS account even after retirement or resignation from your job.
  • Competitive returns: NPS has generated competitive market-linked returns over the years. Since inception, the equity scheme has given around 12% return per annum over 15 years. The government scheme has given over 9.4% per annum on an annual basis. The returns vary depending on the fund manager, asset allocation and market conditions.

However, NPS also has some drawbacks, such as:

  • Annuity requirement: As per the current rules, you have to annuitize at least 40% of your accumulated corpus at the time of retirement or exit from NPS. The annuity income is taxable as per your slab rate. The annuity rates are also relatively low compared to other fixed income products.
  • Withdrawal restrictions: You can withdraw up to 60% of your corpus at the time of retirement or exit from NPS. However, you can only withdraw up to 25% of your own contributions before retirement for specific purposes such as higher education, marriage, medical treatment etc. You have to complete at least three years of contribution to avail this facility.
  • Long-term commitment: NPS is a long-term investment product that requires you to stay invested till the age of 60 or beyond. You cannot exit from NPS before that unless you have a terminal illness or death. You also have to contribute regularly to your NPS account till retirement.

Therefore, NPS is a good option for investors who are looking for a low-cost, tax-efficient and flexible retirement savings scheme that can provide them with a regular income after retirement. However, they should also be aware of the annuity and withdrawal rules and the long-term nature of NPS.

To invest in NPS, you need to open an account with any of the registered intermediaries and choose your fund manager and scheme preference. You can also visit the official website of PFRDA (www.pfrda.org.in) or NPS Trust (www.npstrust.org.in) for more details.

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