The National Pension System (NPS) is a voluntary, defined contribution retirement savings plan created to help members make the best choices for their future via systematic saving throughout their working lives. Anybody who is between the age group of 18-65 is eligible for investing in NPS.

By investing in NPS, a person can develop the habit of saving for their retirement. It is an effort to provide long-term solution to the issue of giving each Indian person a sufficient retirement income.

What are the advantages of investing in NPS?

1.     Flexible:

NPS provides a selection of Pension Funds (PFs) and a range of investment possibilities so that subscribers can plan their investments’ growth in a reasonable manner and keep tabs on the pension fund’s expansion. They can make 75% of their equity investment in the total asset allocation. Subscribers also have the option of switching from one investment option or fund manager to another (NSDL).

2.     Simple:

When an subscriber opens an account for investing in NPS, a Permanent Retirement Account Number (PRAN) is issued to the investor. This is a unique number and belongs to the subscriber for the rest of their life. This plan has two levels:

• NPS Tier-1 Account: This is the non-withdrawable permanent retirement account into which the investor’s regular contributions are credited and invested in accordance with the portfolio/fund manager of the investor’s choice. Under Sec 80 CCD (1), an individual can claim tax benefit along with an overall ceilingof Rs. 1.5 lac under Sec 80 CCE.
• NPS Tier-2 Account: This voluntary withdrawable account is only permitted if the subscriber has a current Tier I account in their name. Withdrawals from this account can be made in accordance to the subscriber’s demands as and when necessary.

3.     Portable:

NPS offers effortless portability between jobs and locations. Unlike many pension programmes in India, it would allow individual members to move to a new job or area without having to worry about leaving behind a built up corpus.

4.     Well- Regulated:

NPS is governed by Pension Fund Regulatory and Development Authority (PFRDA), and NPS Trust regularly monitors and evaluates the performance of fund managers.. The account maintenance fees while investing in NPS are much lower, when compared to the other similar pension products that are offered worldwide.

5.     Dual benefit of Low Cost and Power of compounding:

Pension wealth accumulation increases over time with a compounding effect till retirement. Due to the minimal account maintenance fees, the subscriber eventually gets benefitted greatly from the accrued pension wealth.

What are the Disadvantages of investing in NPS?

1.     Lesser benefits that previous ones:

This scheme was created to stop all the benefits of the employees related to defined pensions.

2.     Withdrawal limits:

Before the subscriber becomes 60 years old, NPS bans all withdrawal types. After opening the account for 10 years, the subscriber may withdraw money for the first time from NPS. From that point on, he or she may take money a total of three times, up until the age of 60.

The withdrawal amount cannot exceed the subscriber’s entire contribution history. The employer’s payments to the NPS fund for employees are not considered the subscriber’s investments.

3.     Providing taxation:

When the programme matures, the NPS corpus, which the subscriber can used to purchase annuities or to draw pensions, is taxable. While investing in NPS, the Government of India taxes 60% of the money, whereas only 40% is not subjected to taxation.

Other products, such as the EPF and Public Provident Fund, among others, are not taxed when they mature.

4.     No fixed returns:

Despite the fact that NPS is a government programme, the corpus is formed in accordance with the returns produced by corporate bonds, government securities, and equity. Therefore, the returns or gains may be negatively impacted by market movements.

Investing in NPS

A subscriber can start investing in NPS under the following asset class. These are:

·        Equity:

A “high return-high risk” asset class that primarily invests in equities market investments is called equity.

·        Corporate Debt:

Corporate Debt is a “medium risk-medium return” asset class that primarily invests in fixed income-bearing securities.

·        Government securities:

 Government Securities, is a “low return-low risk” asset class that only invests in companies.

·        Alternative Investment Funds:

Investments are made in CMBS, MBS, REITS, AIFs, Invlts, and other securities under this asset class.

If an investor is cautious, he/she may decide to allocate their pension assets to the Corporate Bond or Government securities asset classes. However, an investor can only deploy up to 75% of their funds to Equity or up to 5% in alternative investment funds.

How are returns in Tier I and Tier II calculated?

The Pension Fund Manager(s) that the Subscriber chooses while registering receive the contribution that was deposited into their account (or changed subsequently). At the end of each business day, the PFMs invest the funds and announce Net Asset Value (NAV).

Units are subsequently credited to the Subscriber’s account based on the NPS NAV performance. By multiplying the units held by the NAV, the subscriber can calculate the investment’s present value. The market determines the return under NPS. Therefore, the NPS return rate is not fixed.

Indian residents can be encouraged to save money and provide them with adequate retirement income by investing in NPS. The National Pension Scheme can create a workable retirement solution.  

Happy Investing!