Wednesday, 22 February 2017

Advantages and Disadvantages of National Pension Scheme (NPS)

In this article we are going to cover the advantages and disadvantages of NPS. The basic objective of the national pension scheme is to provide a pension opportunity to every Indian.



NPS enables you to safe, particularly for retirement. It helps you save regularly, invest regularly and stay invested for a longer duration. Your NPS contribution gets invested into the stock market, corporate debt and government securities. So for the people who have never invested in the stock market directly or through mutual funds and the people who have not even invested in ELSS, NPS serves as an instrument to diversify their retirement investment.

NPS is transparent as you know how much of your money is getting invested into the stock market or government securities, as you are the one who decide this proportion. NPS is accessible as you can open an NPS account through PSU banks, many private banks and through post offices. Investments in NPS can be claimed for tax reductions under the overall limit of the section 80C and an additional tax reduction of 50,000 rupees is available under the section 80CCD1B. A Low fund management charge of 0.1% makes NPS the cheapest retirement product. The other charges like account opening fee, etc. are also very less. The permanent retirement account number that you get when you opt for NPS is portable. You have a choice of 7 fund managers to switch your investments and this choice of fund managers is likely to go up in the future.



Only partial withdrawal of the final corpus that you get on retirement is allowed. That is, 40% of your final corpus you can withdraw without paying any taxes and additional 20% can be withdrawn by paying taxes and the remaining 40% has to be utilized to buy an annuity. If you don't want to pay any taxes, you would have to utilize 60% of the corpus to buy an annuity. The next disadvantage is, compulsory buying of annuity with 40% of your retirement corpus. Annuities are currently giving returns about 6-7%, which are very low. So there might be a situation where in the retiree wants to invest in some other avenue. Like senior citizen saving scheme, Mutual funds etc. But NPS does not allow the investment of this 40% of corpus into any other avenue. The next disadvantage is that the returns from the annuity is taxed. On the other hand, there are certain other investment options like mutual funds, where in the returns are tax free after a certain duration. Another disadvantage is, the maximum of 50% of your contributions can be invested in equity. So they might be young people or some others too who would want to invest a higher portion into equity to build a better corpus.

The maximum of 50% of allocation to equity might change in the near future as the pension regulator PFRDA is all set to launch two schemes, one for aggressive subscribers and another for conservative subscribers. Aggressive subscribers may allocate up to 75% of funds to equity, whereas conservative subscribers may allocate up to 25% of their funds to equity. As per the pension fund regulator PFRDA, the NPS fund managers currently have a passive fund management approach. NPS funds invests in stocks which make up the indices like the Nifty and the Sensex. The NPS funds go up or down in the same proportion as the indices. So here, there is no effort made to beat the index as it is done with the actively managed funds. However the PFRDA is considering active fund management in the near future. NPS has the longer lock-in period. So for someone who is just 25 years of age, he cannot touches corpus for 35 years. In these 35 years partial withdrawals of the contributions that you have made is allowed in certain conditions. And again on retirement 40% of the corpus is locked-up in the annuity. And in case if you retire before 60 years of age, 80% of your corpus is locked-up in the annuity.

Read: EPF and NPS differences, Should you Invest into NPS?

Friends, we are trying to discuss the advantages and disadvantages of the NPS as of today. NPS is an evolving scheme, so it might get a EEE status in the future or maybe the corpus that you get to retirement would be indexed and then taxed. So only time can tell whether it becomes more advantages or disadvantages.