What are the Pros of NPS?

The National Pension System (NPS), a government-backed retirement savings plan, is widely recognized as one of India's most powerful investment tools for retirement planning. Governed by the Pension Fund Regulatory and Development Authority (PFRDA), the NPS is designed to provide subscribers with a steady income after retirement, along with a range of tax benefits*. However, like any investment scheme, it comes with its own set of advantages. This article delves into the key pros and cons of NPS,providing a comprehensive overview to help you make an informed decision about your retirement savings.

Pros:

Powerful Retirement Scheme: The NPS is governed by PFRDA and is one of the most powerful retirement schemes in India. Investors can choose to invest in professionally managed pension funds linked to markets, and enjoy exclusive tax benefits*, good returns,and fund security.

Tax benefits*: NPS offers exclusive tax benefits*, making it as good as an EEE (Exempt, Exempt, Exempt) regime. You get dual benefits on self-contribution, employer’s contribution as well as corpus growth. You can enjoy exclusive tax deductions under various sections of the Income Tax Act. Tax exemptions are also available on exit and partial withdrawals as per the rules.

Employer's Contribution:Salaried individuals are also eligible for benefits on contributions to NPS account by the employer. On employer’s contribution, under old tax regime they are eligible for tax deduction up to 10% of salary (Basic + DA)* under Section 80 CCD (2) and under New tax regime only the corporate contribution is available with 14% of the Basic+DA* 3. As per the regulation, the tax benefit (old or new tax regime) is capped at INR 750,000 for FY including the employer contribution for PF + SAF + NPS

Cost-Effective: The management cost of NPS is less than other equity-linked market products such as mutual funds. The exit and withdrawal NPS expenses are also capped, making NPS a cost-effective long-term pension cum investment option.

Diversification & Flexibility: NPS offers ample flexibility, including the choice of fund manager, asset allocation, and portability. Investors can choose from various fund options and monitor the growth of the pension fund and/or switch as needed.

Final Thoughts

In conclusion, the NPS is a robust and flexible retirement savings scheme that offers notable tax advantages, a range of fund choices, and relatively lower costs. However, it also presents certain challenges such as withdrawal restrictions, mandatory annuity purchases, and potential complexity in selecting the best fund manager. While the benefits of the NPS can make it an attractive choice for many, it's crucial to consider its limitations and align them with your financial goals and retirement plans. It's recommended to consult with a financial advisor to understand how the NPS can fit into your broader retirement strategy. Always keep abreast of the latest changes and updates to the system to maximize the benefits of your investment.

FAQs

1. What is the National Pension System (NPS)?

The National Pension System (NPS) is a government-backed voluntary pension scheme in India that allows individuals to invest in pension funds for their retirement. It is governed by the Pension Fund Regulatory and Development Authority (PFRDA).

2. What are the tax benefits* of investing in NPS?

NPS offers several tax benefits*. Under old tax regime Subscribers can claim deductions up to Rs.1,50,000 under Section 80CCE and an additional upto Rs. 50,000 under Section 80CCD (1B). Furthermore, employer's contributions up to 10% of salary (Basic + DA) are also eligible for tax deductions under Section 80CCD (2). under New tax regime only the corporate contribution is available with 14% of the Basic+DA* u/s 80CCD(2). The overall capping while calculating the employer contribution tax benefit is capped at INR 750,000 including the Employer’s contributions towards PF + SAF + NPS in totality.

3. Is the corpus received at maturity taxable?

NPS comes with a lock-in period and restricts any withdrawals until the policyholder reaches 60 years of age. The first withdrawal can be made after 10 3years active years from the PRAN generation date the account, with a maximum of 3 withdrawals until they reach 60 years of age. Additionally, after completing 5 years of holding an PRAN subscriber can execute pre-mature exit as well.

4. Is the corpus received at maturity taxable?

Yes, the corpus received at maturity that is used by the NPS account holder for buying an annuity is GST free.While 60% of the corpus is received lumpsum Tax free in the hands of the Subscriber.

5. Can I open more than one NPS account?

No, only one NPS account can be opened by a single individual.

6. Is buying an annuity mandatory under NPS?

Yes, at maturity, the NPS account allows the withdrawal of 60% of the funds, while the rest of the 40% is used to buy the annuity.

7. What is the lock-in period of NPS?

The lock-in period under NPS is until your retirement age, which is 60 years. Having said that, in case of emergency subscriber can execute partial withdrawal of 25% of own contribution tax free under prescriber conditions.

8. How can I choose the best fund manager for my NPS investments?

NPS offers the flexibility of choosing a fund manager. However, if you're not familiar with terms related to securities, equities, debt, etc., it might be challenging to choose the best fund manager. In such cases, consulting with a financial advisor can be helpful.

9. How cost-effective is NPS compared to other investment options?

The management cost of NPS is less than that of other equity-linked market products such as mutual funds. The exit and withdrawal NPS expenses are also capped, making NPS a cost-effective long-term pension cum investment option.

10. How diversified and flexible is NPS?

NPS offers ample flexibility, including the choice of fund manager, asset allocation, and portability. Investors can choose from various fund options and monitor the growth of the pension fund and/or switch as needed.

Disclaimers

*Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.