Advantages and Disadvantages of NPS

Worried about managing your post-retirement finances? The NPS has got you covered. But what is NPS? 

Launched in 2004 under the PFRDA Act, the National Pension System (NPS) builds your retirement fund through regular investments. After retirement, you are entitled to a partial withdrawal from the corpus while retaining the rest to purchase an annuity that sustains a monthly pension. As NPS is a market-linked investment, its returns are also decent, making it an attractive investment option for retirement planning.

In this article, we’ll explore NPS's advantages and disadvantages and how to leverage them for long-term financial security.

What is NPS?

The NPS was introduced under the Pension Fund Regulatory and Development Authority Act in 2004. Under the NPS, your money is invested in diverse assets, including corporate bonds, stocks, alternative investment funds, and government securities. Funds invested in these assets are known to yield good returns, making it a wise decision to start investing early to obtain a higher return value at retirement. However, it's better to weigh the pros and cons of NPS before investing.

Advantages of NPS

Here are some of the significant NPS scheme advantages that make it a widely chosen retirement plan:

1. Low investment threshold

NPS offers Tier I and Tier II accounts that require very low minimum investment amounts. These amounts are as low as Rs. 500 to Rs. 250, respectively.

2. Tax benefits

Income Tax Act entitles members of the scheme to a tax deduction of approximately Rs. 2 Lakh per year (Rs. 1.5 Lakh under Section 80C + Rs. 50,000 under Section 80CCD(1B)).

3. Diversified asset investments

After investing in NPS, your finances are allocated across assets of varying risk levels, ranging from low to high. This also provides greater returns and stability.

Disadvantages of NPS

Though not many, there are a couple of NPS scheme disadvantages to be mindful of before choosing to invest:

1. Partial taxation at withdrawal

When the scheme matures, you can withdraw 60% of the corpus, but the remaining 40% is taxable and can only be used to purchase an annuity.

2. Limited premature withdrawals

You can withdraw only 25% of your investments before retiring, while the remaining 80% goes to annuity. This can be done just thrice before retirement. 

3. Lowering equity rates

Your rate of equity starts to drop by 2.5% per year after you turn 50 years of age. This means that NPS is not entirely optimal for those seeking high returns.

Conclusion

The NPS is a secure savings plan for retirement. It may not suit those chasing high returns since equity exposure reduces with age and early withdrawals are limited. But if you want a low-cost, steady investment for the long run, NPS is a solid option. Just take into consideration NPS advantages and disadvantages before committing.

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