Pros and Cons of NPS
The National Pension Scheme (NPS) is a government-sponsored voluntary contribution plan that aims to help you save for retirement. The National Pension System (NPS) is a safe and secure savings vehicle administered by fund managers who are governed by the Pension Fund Regulatory and Development Authority (PFRDA).
Until maturity, the money invested earns market-linked returns. A minimum of 40% of the entire contribution is utilized to purchase an annuity at maturity, while the remaining 60% is provided to you in a lump sum payout.
NPS, like any other financial instrument, has its own set of benefits and drawbacks. Let’s have a look at what they are:
Pros of NPS
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The freedom to make decisions:
The auto choice and the active choice are the two alternatives provided by NPS (National Pension Scheme). The fund management oversees your assets and invests in a mix of stock, corporate bonds, government securities, and alternative investment funds under the auto pick option, based on their expertise and evaluation. If you have limited experience with asset allocation and want a professional to manage your money, this is the best option. You may choose the active option if you wish to manage your asset allocation yourself. Up to the age of 50, you can invest up to 75% in shares, 5% in alternative investment funds, and the rest in corporate bonds and government securities under this plan.
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Partially withdrawals:
One of the main benefits of NPS is that it allows you to utilize a part of your savings for emergencies or other monetary needs. After a minimum of 10 years, you can take 25% of your payments under the Tier I program. However, you may only make three of these withdrawals in a row, with at least a five-year interval between them.
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Tax advantages:
The National Pension System (NPS) provides tax advantages under several provisions of the Income Tax Act of 1961. Section 80CCD-1 allows you to claim a tax deduction of up to Rs. 1.5 lakh. You can additionally deduct 10% of the employer’s basic income that is invested in NPS. Finally, voluntary contributions are free from taxation up to Rs. 50,000.
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Significant diversification:
By investing in a mix of equities and debt, NPS provides a high level of diversity. The plan offers attractive market-linked returns while also assisting you in planning for your retirement years.
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Contributions that are flexible:
The number of contributions you can make in a year is unlimited. Furthermore, there are no maximum or lower restrictions on how much money can be contributed to the system. You may put as much or as little money into your account as you choose, and you can make contributions yearly, half-yearly, quarterly, or monthly.
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Changing the fund manager is an option:
If you are unhappy with your current fund manager’s performance, you can change to a new one at any time.
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Enhanced convenience:
The NPS account is simple to establish and manage. Using your Permanent Retirement Account Number, you may manage your contributions online (PRAN).
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Tax liability:
Despite the tax advantages, NPSs wind up paying a lot of taxes as they mature. The corpus is added to your taxable income at a rate of 60%. In retirement, this raises your tax output.
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Withdrawals are restricted:
Because the NPS is a pension plan, only a certain amount and number of withdrawals are permitted until the account matures. This might be an issue if you’re in a financial emergency and require a large chunk of money right now.
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Equity exposure is limited:
NPS decreases the percentage of equity exposure by 2.5 percent per year beyond the age of 50. By the age of 60, the equity exposure has been decreased to 50%. For some, this may be unfavorable.
Cons of NPS
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Liability for taxes:
Despite the tax advantages, NPSs wind up paying a lot of taxes as they mature. The corpus is added to your taxable income at a rate of 60%. In retirement, this raises your tax output.
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Withdrawals are restricted:
Because the NPS is a pension plan, only a certain amount and number of withdrawals are permitted until the account matures. This might be an issue if you’re in a financial emergency and require a large chunk of money right now.
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Equity exposure is limited:
NPS decreases the percentage of equity exposure by 2.5 percent per year beyond the age of 50. By the age of 60, the equity exposure has been decreased to 50%. For some, this may be unfavorable.
To sum up
Despite a few drawbacks, NPS (National Pension Scheme) is still one of the most popular pension plans in the country, and the benefits of NPS are difficult to overlook. Although the decision to invest in it is entirely yours, adding NPS to your portfolio can provide you with financial stability and safety in retirement. Furthermore, because this is a government-backed initiative, you have nothing to be concerned about.