National Pension Scheme: Is it a Smart Choice for your Retirement?
The National Pension System is a long-term investment scheme for retirement available for the citizens of India. This system is regulated by the Pension Fund Regulatory and Development Authority and the Central Government of India. 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 employees from the public, private and unorganized sectors. An investor can invest in this scheme during the period of his or her employment at regular intervals.
Later at the time of retirement planning, the investor is allowed to 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 of choosing the National Pension System as an investment option for your retirement.
Advantages of National Pension Scheme:
The NPS helps in gaining high returns for the investors as compared to the other tax investments 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 in the equities and this makes it a much 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 deduction 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 available by offering a tax deduction of up to Rs. 2 lakhs in totality.
Disadvantages of National Pension Scheme
Opting for NPS has its disadvantages when compared along with other retirement investment options available in the market.
The NPS only helps in accumulating the retirement corpus. This corpus is utilized to buy an annuity product or a pension product. Many people have this idea that the NPS provides monthly pensions to its subscribers after their 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 but even though the investment in NPS is exempted under Section 80 C of the Income Tax Act 1961. However, the retirement corpus that is accumulated, overtime is very much subject to taxation. the 60% of the investment that is allowed to be withdrawn at the age of 60 is tax-free but the remaining 40% which would be used to buy a suitable annuity product to receive a monthly pension would be subject to taxation.
No guarantee on returns
The returns on this form of investment are subject to the market conditions and its 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. The 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, you should not disregard its shortcoming as a system. This scheme would not be suitable for a few due to its nature, thus you must research well about the investment schemes and then make an informed decision by choosing a suitable retirement option plan as per your needs.