Is Investing In The National Pension Scheme The Right Choice For You?

Despite its widespread use as a tax-saving tool, the National Pension Scheme (NPS) is often misunderstood and underappreciated for its full range of benefits. In fact, it’s becoming increasingly competitive due to its unique features.

The market-linked voluntary contribution scheme, popularly known as the National Pension Scheme (NPS) is one of the go-to schemes that build up a retirement corpus. The scheme is available to all the citizens of India who are between the ages of 17 and 70 years. But the question stands is it any worth investing in?

This is the scheme through which one can earn a good amount of capital after retirement without the requirement of a government job.

Specifics Of The Scheme

A fixed amount of capital is deposited every month which continues till the age of 60, on which the bank offers an interest of somewhere around 9-12 percent on the deposited amount. Out of this a lump sum of 60% can be withdrawn from the total deposited amount and the remaining 40 % can be taken as pension every year.

The framework of this scheme functions under two tiers.

Tier 1: This is where regular monthly contributions are made and a permanent retirement account is created. The contribution can be made by the subscriber or the employer.

Tier 2: This is a voluntary/optional withdrawal account and only individuals who are subscribed to the Tier 1 account can opt for this facility.

Four asset classes to invest in NPS

  •       Equity and related investments.
  •       Corporate debt and related investments.
  •       Government bonds and related investments.
  •      Alternative investment funds.

The contributor has the freedom to invest in an active manner or alternatively opt for the autoroute, where the allocation of funds takes directly among asset classes as per the pre-defined matrix according to the age of the subscriber.

What Advantages Does The NPS Bring To The Table

The NPS has gained considerable traction recently as it brings some fresh benefits to its subscribers. Firstly, it stands out for its low cost, ranking among the most cost-effective pension funds available. Additionally, the NPS provides portability, allowing individuals to maintain their accounts irrespective of changes in employment or location. Moreover, it is known for its tax efficiency, providing various tax benefits for both contributors and employers.

Furthermore, the scheme prioritizes transparency, ensuring readily accessible data on portfolio performance. It also aims to deliver optimum returns by offering market-linked returns, catering to the dynamic nature of financial markets. Lastly, the NPS accommodates individuals of varying ages, allowing entry up to the age of 70, thereby providing flexibility and accessibility to a broader range of participants.

Despite its widespread use as a tax-saving tool, the National Pension Scheme (NPS) is often misunderstood and underappreciated for its full range of benefits. In fact, it’s becoming increasingly competitive due to its unique features.

One notable advantage is its flexibility: investors can select different fund managers for various asset classes, allowing for tailored management of their investments. Moreover, the NPS allows for tax-free switching between asset classes up to four times a year, facilitating easy re-allocation without incurring additional costs.

Another standout feature is systematic withdrawal, enabling retirees to withdraw 60 percent of their investment in tranches through a systematic withdrawal plan (SWP) until the age of 75, without the need to reinvest a lump sum amount. This not only simplifies post-retirement financial planning but also offers tax efficiency.

Additionally, the NPS offers a choice of annuities for 40 percent of the corpus, allowing investors to align their retirement income with their specific goals. These advantages underscore the NPS’s merit as a valuable component of a retirement portfolio, complementing other investment avenues like mutual funds, which offer further flexibility and diversification.