The National Pension System is a long-term investment scheme for retirement available for the citizens of India. The Pension Fund Regulatory and Development Authority and the Central Government of India regulate this system. It is one of the most popular investment plans of the time. Initially, only the Central Government employees were covered under this scheme, but now it is open for public, private, and unorganized employees. An investor can invest in this scheme during their employment at regular intervals.
Later, at the time of retirement planning, the investor can take away a certain sum of money, and the rest is invested in an annuity. This remaining corpus is received in the form of a monthly pension. There are multiple benefits to choosing the National Pension System as an investment option for retirement.
Advantages of the National Pension Scheme:
High returns
The NPS helps gain higher returns for the investors than the other tax investment schemes available. You can earn an annual return of up to 8% to 10%. The funds may vary as they are market-linked.
Equity allocation of 50%
The NPS investments are made in equity. Up to fifty percent of your investment can be allocated to equities, making it a more attractive investment option. There are two different options available to invest. One is the auto-selection, and the other is an active selection.
Tax benefits available
The investments made in this scheme allow a deduction of up to Rs. 1.5 lakh for your as well as the employer’s contribution. The belief in investment under section 80 CCD1 is 10% of the wage. This can go up 20% of the gross income for the self-employed taxpayer. An investor can claim other self-contribution of investment under Section 80 CCD (1)B to get tax benefits. This makes it one of the best investment options by offering a tax deduction of up to Rs. 2 lakhs.
Disadvantages of National Pension Scheme
Opting for NPS has disadvantages when compared with other retirement investment options available in the market.
No pension
The NPS only helps in accumulating the retirement corpus. This corpus is utilized to buy an annuity product or a pension product. Many believe that the NPS provides monthly pensions to its subscribers after retirement. It is essential to have enough funds accumulated to continue the further process. Thus, one must take this into notice before going for this option.
Implications in tax
Not many are aware of this, even though the NPS investment is exempted under Section 80 C of the Income Tax Act 1961. However, the retirement corpus accumulated time is very much subject to taxation. The 60% of the investment allowed to be withdrawn at 60 is tax-free, but the remaining 40% used to buy a suitable annuity product to receive a monthly pension would be subject to taxation.
No guarantee of returns
The returns on this form of investment are subject to market conditions and volatility. The return on these schemes depends upon the performance of the underlying securities, such as corporate bonds, government security, and equity. This creates a negative impact on the investors. Withdrawal is also a restricted choice.
In conclusion, it can be said that considering all the factors, the National Pension System will be a smart choice from the point of view of a retirement investment plan. However, it would be best if you did not disregard its shortcomings as a system. This scheme would not be suitable for a few due to its nature. Thus, it would be best if you researched well about the investment schemes and then made an informed decision by choosing a sensible retirement option plan per your needs.