The National Pension System (NPS), regulated by PFRDA, has emerged as a popular investment scheme aimed at saving for one’s retirement. NPS is essentially a market linked investment that helps accumulate one’s savings towards retirement. After opening an NPS account, one has to keep saving during the ‘deferment phase’ or the ‘accumulation phase’ and then start getting a pension from the ‘annuity phase’.
Being a market linked product, the monthly or the yearly savings in NPS can be invested in one or more assets such as equity, debt or both and the funds are managed by professional pension fund managers. For those who wish to accumulate retirement funds and get a fixed pension during their retirement years, NPS is an investment to consider.
However, before you open an NPS account and start saving, here are a few important features to keep note of. NPS being a long term investment, exiting from the scheme later on may prove detrimental while knowing how it works will help you accumulate the right amount for retirement. Here we look at factors that may not suit all investors.
1. Who want to invest 100 per cent in equities
NPS does not have the option to invest 100 per cent of your savings in equities. Similar to mutual funds, there are fund options to choose in NPS but there is an upper cap when it comes to allocating funds in equities. Although, one is allowed to invest 100 per cent in fund options with corporate bonds and government bonds as the underlying securities, under equity fund option, a maximum of 75 per cent of your savings can be invested. The upper limit of 75 per cent (up to age 50) is under the Active Choice while in the Auto Choice mode of investing, a maximum of 75 per cent (up to age 35), is allowed which further keeps reducing as one age and as per the Life Cycle Fund opted for.
It is important to understand that NPS being a mass-market investment product, such upper caps could be helpful to most investors over the long term. Knowing them helps to make better investing decisions based on one’s own risk profile.
2. Who do not want to lock-in funds for long period
NPS is a long term savings scheme aimed specifically to create a corpus for post-retirement needs. If someone opens an NPS account at age 30, the NPS will mature when he or she is 60 and then there is a provision of lifetime pension. It means, the NPS account (Tier I) that you open today could stay with you for several decades from now. Early exit from NPS is allowed but to surrender and withdraw before maturity will not serve the purpose well and hence knowing about the structure beforehand helps.
For your post retirement needs, a lifetime pension is certainly something you plan for and hence opt for NPS knowing the long term nature of the NPS scheme.
3. Who want lump sum on maturity
If you are investing in NPS to withdraw the entire corpus on maturity, you need to relook at your objective. On maturity, you can withdraw a maximum of 60 per cent of corpus while the balance 40 per cent will have to be transferred to a life insurance company to provide a regular pension to you.
Being a retirement focussed investment, there is a provision to get mandatory pension in NPS and hence 100 per cent of corpus is not allowed to be withdrawn under normal circumstances.
4. Who do not want fixed pension for lifetime
Under NPS, there is a fixed pension amount provided by the annuity provider depending on the interest rate prevalent during the retired years. If you want to use your savings directed towards retirement to be used as per your own wish, NPS may not suit you.
5. Who do not wish to take tax benefit
NPS has several tax benefits and can help you bring down the tax liability. Under Section 80CCE, the aggregate amount of deduction under sections 80C, 80CCC and Section 80CCD(1) can be availed up to Rs.1. 5 lakh. In addition, a deduction is allowed under section 80 CCD(1B) in respect of any amount invested in NPS up to Rs. 50,000. Finally, contribution made by the employer up to 10 per cent of salary (Basic plus Dearness Allowance) can be claimed as a deduction from the taxable income under Section 80CCD(2) and is over and above the ceiling limit of Rs 1.5 lakh provided under Section 80C and limit of Rs 50,000 under Section 80CCD(1B). However, if you do not want to take tax advantage or have already opted for the New Tax Regime (Section 80CCD(2) is allowed), NPS tax benefits will not be of help to you.
