As a retirement planning vehicle, the National Pension System (NPS) provides several special benefits. With a minimum deposit amount it offers large investment options over other retirement funds options such as the Employees Provident Fund (EPF) and the Public Provident Fund (PPF). Although the investor does not have the opportunity in PPF and EPF to settle on the instrument where his investments will be deposited in NPS, he or she has several choices to pick from.
Why you should go for NPS?
In equities under NPS, up to 75 percent allocation can be taken to increase the range of receiving higher yields. Simultaneously at least 25 percent of the deposits stay allocated in debt instruments which, in the event of any sudden downturn in the equity markets, provide downside security of retirement savings. In recent years, NPS investments have generated strong returns. The last five-year return from NPS equity schemes ranges between 14.50 percent to 15.80 percent, while over the last five years, its government bond funds and corporate dent funds have generated between 10.29 percent and 11.90 percent.
It is never possible to expect those returns from the EPF or PPF. The tax advantages of NPS are another major gain Under Section 80C of the Income-tax Act, 1961, NPS contributions are eligible for tax deductions up to Rs 1.5 lakh and even up to an additional Rs 50,000 under Section 80 CCD (1B). So, in the case of EPF or PPF, one can get tax deductions of up to Rs 2 lakh in NPS opposed to the upper limit of Rs 1.5 lakh deduction. NPS, in comparison, is highly cost-effective. In NPS, pension fund manager charges are currently capped at 0.01 percent relative to the 2.25 percent gross expense ratio for mutual funds.
Why you shouldn’t go for NPS?
The NPS might not be the perfect retirement investing instrument for everybody, considering the above advantages. Although PPF and EPF benefit under exempt-exempt-exempt (EEE) status, NPS maturity proceeds are not exempt from full tax. At the time of retirement, 60 percent of the accrued corpus of the NPS fund can be withdrawn as tax-free and the remaining 40 percent must be deposited in the purchase of an annuity that has low pre-tax gains. Current annuity initiatives provide pre-tax returns of 3-7% . In the hands of the subscriber, annuity earnings is taxable as per his/her tax slab. In contrast, you can earn NPS-like or even stronger returns if you plan properly and deposit your retirement investments in ELSS funds, and returns from the portfolio in excess of Rs 1 lakh per year are taxable at 10% of long-term capital gains from equity.
NPS’s second drawback is its long lock-in duration. Until the age of 60, the amount invested in NPS remains locked-in. Whereas NPS enables partial withdrawals of up to 25 percent of the investments, it is only for particular purposes, such as higher education or child marriage and specific disease, and so on. If you are looking for a higher degree of independence over your investments and don’t want your capital to be locked-in for such a long duration of time NPS might not be the best choice for you. Compared to EPF, PPF and ELSS, the lack of consistency in reinvestment opportunities after maturity and the longer lock-in duration of the invested amount make NPS less appealing.
