New Delhi: The National Pension System (NPS) has unique advantages as an instrument for retirement savings. It is inexpensive and also offers a wide choice of investments compared to other retirement savings products such as the Employee Provident Fund (EPF) and the Public Provident Fund (PPF). While in PPF and EPF, the investor has no option to decide on the instrument in which his savings would be invested, in the NPS he has several options to choose from.
Benefits of NPS
Up to 75% equity exposure can be taken in NPS, which increases the return potential of NPS. At the same time, at least 25% of savings remain invested in debt securities, which guarantees downside protection for retirement savings in the event of a sharp correction in the equity markets.
NPS funds have generated strong returns over the past few years. The five-year returns of the NPS stock plans vary between 14.50% and 15.80%, while its government bond funds and corporate debt funds have generated between 10.29% and 11. , 90% in the past five years. These types of feedback can never be expected from EPF or PPF.
Another major advantage of the NPS is its tax advantages. NPS contributions are eligible for tax deduction under section 80C of the Income Tax Act 1961, up to Rs 1.5 lakh and also under section 80 CCD (1B) up to to 50,000 additional Rs. Thus, one can obtain a tax deduction of up to Rs 2 lakh in NPS compared to a maximum deduction of Rs 1.5 lakh in the case of EPF or PPF.
In addition, the NPS is extremely cost effective. Management fees for pension funds in the NPS are currently capped at 0.01%, compared to a maximum expense ratio of 2.25% for mutual funds.
Despite the above benefits, the NPS may not be the best retirement savings vehicle for everyone. While the PPF and EPF (annual investment up to Rs 2.5 lakh) benefit from an exempt and exempt treatment (EEE), the product at maturity of the NPS is not completely exempt from tax. A maximum of 60% of the corpus accumulated in the NPS fund can be withdrawn tax-free upon retirement and the remaining 40% must be invested to purchase an annuity, which provides derisory pre-tax returns. Currently, annuity plans offer pre-tax returns of 3.5-6%. The annuity income is taxable in the hands of the receiver according to his tax base. In comparison, if you plan well and put your retirement savings in ELSS schemes, you can generate NPS-like or even better returns and fund returns above Rs 1 lakh per year are taxed at 10% (capital gains Long-term equity).
The second downside of NPS is its long lockout period. The amount invested in the NPS remains blocked until the age of 60. While partial withdrawals of up to 25% of your contributions are allowed in the NPS, this is only for specific purposes like higher education or child marriage and a specific illness, among others.
If you want more control over your finances and don’t want your money to be tied up for such a long period of time, NPS may not be a suitable option for you. The lack of flexibility in reinvestment options after maturity and a longer lock-in period for the amount invested make NPS less attractive compared to EPF, PPF and ELSS.