NPS: Is National Pension Scheme a good option for retirement? Know its pros and cons

The National Pension System (NPS) is a government run scheme that is aimed at creating retirement benefits of workers in both public and private sectors. The voluntary contribution pension scheme is managed by Pension Fund Regulatory and Development Authority (PFRDA), a statutory body under the Union Finance Ministry.

The scheme has been launched for retirement benefits of employees. Through NPS savings the employees can build a large corpus fund over the years even by depositing small amounts every month.

Anyone between the age of 18 and 70 can make a contribution toward NPS and avail the same in monthly instalments after its maturity. Notably, the scheme generally matures after the subscriber completes that age of 60 and it can be extended up to 70 years of age.

While subscribers can make a minimum contribution of Ra 6,000 annually, they can also pay the same in monthly installments of Rs 600.

After attaining the age of 60, the investors can with the entire amount lump sum or opt for periodic payouts.

Considering a number of benefits and ease of access, it may sound like a good investment option for retirement. However, just like any investment option, NPS also has its own set of pros and cons.

Before investing in an NPS plan it’s advisable to check its advantages and disadvantages in order to make a better choice.

National Pension Scheme: Advantages

1. Higher returns: The investments made in the NPS accounts tend to give higher returns compared to traditional savings instruments like savings accounts or fixed deposits. The NPS scheme is market linked and the past trends show that the rate of return has been between 9 to 12 per cent. As a higher proportion of NPS contribution is allocated toward equities, it offers higher returns in comparison to other investment options like PPF or FDs.

2. Low investment: With a minimum contribution of Ra 500 and Rs 1,000 for Tier 1 and Tier 2 accounts, respectively, the investors can afford to build a corpus over the years.

3. Tax benefit: One of the major benefits under the NPS scheme is tax deductions. A deduction of 10 per cent of basic salary and dearness allowance towards NPS investment in a financial year is allowed under Section 80 CCD of Income Tax Act, 1961. However, this deduction will be calculated within the 1.5 lakh limit under Section 80C. Also, the contribution by both the employee and the employer is eligible for tax exemption.

4. Easy to access: The scheme is very easy to access as the account can be opened both online and offline. Major banks offer NPS services and the account can be directly opened through

NPS CRA logins.

5. Withdrawal options: While there is a lock-in period in the scheme till the account holder reaches the age of 60 years, still partial withdrawals of up to 25 per cent of the total contribution under certain circumstances is allowed.   

National Pension Scheme: Disadvantages

1. Taxation: On maturity, 40 per cent of the lump sum withdrawal is tax exempt. If the rest 60 per cent is converted into annuity there will be no tax on the entire amount, but the monthly pension amount will attract tax.

2. Lock-in period: Being a retirement product, the National Pension Scheme has a lock-in period till the retirement age of the investor.

3. Mandated annuity: As a Tier 1 account is considered a primary account in NPS, withdrawal from the same is restricted, even at the time of maturity. At maturity, one can withdraw only 60 per cent of the funds and the remaining has to be used towards annuity payouts. On the other hand, for Tier 2 accounts there is no restriction on withdrawal.

4. Withdrawal limits: Withdrawals from an NPS account also have restrictions as subscribers cannot apply for more than three advance withdrawals till they reach the age of 60. The withdrawal amount cannot be more than the total sum of their contribution.