NPS is relatively new compared to other pension schemes in the market and has been available to non-government employees as well. Find out whether this plan is suitable for you.
Retirement-oriented investments require a lot of planning given that they are long term and need small to moderate but regular deposits from time to time. We often dismiss the need to start planning early for retirement. This is a cardinal mistake which only leads to additional burden towards the end of our professional careers. Besides, choosing the right retirement option is crucial to make sure you have a hassle-free life post 60. And don’t just rely on your EPF as that may not be enough for taking care of your life post retirement. While other popular options like PPF and 5-year FDs are made by people nearing retirement, as an added recurring saving other than your EPF contribution, you can try the National Pension System or NPS.
NPS, in fact, is relatively new compared to other pension schemes in the market and has been available to non-government employees as well for almost 9 years now. The scheme is a voluntary contribution unlike the EPF but has a similar aim like the former, to attract those who want to plan for retirement.
Types of NPS Accounts
Investment in NPS can be done through 2 accounts, i.e. TIER I and TIER II.
TIER I – This a compulsory pension account where the investments are auto picked as per the age of the applicant. This account has restrictions on withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I accounts.
TIER II – An investment account where the applicant gets options to invest in equities, corporate bonds and government securities in various combinations. Subscribers with pre-existing Tier I accounts can deposit and withdrawn monies as and when they want. It is similar to a mutual fund’s investment account.
Just like other forms of investments, NPS has its own share of advantages and disadvantages, based on which you should decide whether this scheme is suitable for you. Here are some of the most common pros and cons of investing in the scheme:
Pros of Investing in NPS
# No maximum limit of invest and additional tax-saving of Rs 50,000 under 80CCD(1b) over and above the Section 80C limit of Rs 1,50,000
# Flexibility to choose your own asset allocation between equity and debt
# Option to change pension fund managers
# Complete capital protection
# Open to both Indian citizens and NRIs
# Withdrawals can be made from TIER II account at any point
Cons of Investing in NPS
# Liquidity extremely low of Tier 1 deposits as withdrawals rules are very rigid
# Minimum contribution of Rs 6,000 annually to keep the account active
# Complexity in choosing pension fund manager and starting account
# No transfer of funds from Tier 1 to Tier 2 is possible but the opposite is allowed
# No Tax Benefits for Tier II account
# Proceeds upon maturity will be taxed
# No guaranteed interest rate of returns
(The author is CEO, Bankbazaar.com)