The National Pension System is a pension scheme sponsored by the government which allows its subscribers to regularly contribute to a pension account during their years of working life. The basic aim of the National Pension Scheme is to provide investors with benefits at the time of their retirement. This scheme is mandatory for government employees in India. It offers multiple benefits. However, it has some disadvantages as well.
Pros of Investing in a National Pension Scheme (NPS)
Helps in saving tax
One of the biggest advantages of investing in a National Pension Scheme is the saving of taxes. One may claim additional tax deduction under Section 80CCD(1b) if they happen to have already crossed the ceiling of Rs. 1.5 lakh under Section 80C of the Income-tax Act, 1961.
Allows automatic rebalancing
As per the expert financial planners, it is often suggested that an investor should rebalance the portfolios at least once a year. National Pension Scheme offers the advantage of automatic rebalancing to investors. This scheme gives the option to choose between three lifecycle funds available under it.
The first is aggressive (75% allocation to equity), the second is moderate (50% allocation to equity) and the third is conservative (25% allocation to equity). In this, the portfolio of the investor gets released automatically every year on the date of birth of the investor. Rebalanced portfolios give better results as compared to the static ones in the long run as rebalancing protects the portfolio against the volatility of the market.
Best performance in terms of pension fund
It is a well-known fact that the National Pension System has been one of the best performing funds over the years in several parameters. Balanced investors can invest smartly here for the long term and gain the benefits of this scheme.
This is one of the cheapest plans available with minimum enrolment fees and the return, on the contrary, is quite high. The maintenance of the account is also a very easy and simple process. The subscribers also get the option to change their fund managers.
Cons of investing in a National Pension Scheme (NPS)
The lock-in period for a National Pension Scheme is usually around for 20-25 years. This might appear like a very long time for the young investors. This makes them less interested eventually and is not a preferred option for investment for the millennials. Other options such as Fixed Deposits such as Bajaj FD, provide investment options for long-term and short-term goals and thus can be taken as an alternative from the same.
Unfair to Tax annuity
Another disadvantage of investing in an NPS is that it creates an impression of saving tax whereas the same is being deferred. The 60% corpus which one could withdraw on maturity is generally tax-free and the 40% left has to be put into an annuity to earn a pension that is fully taxed an income.
The annuity tax is unfair as the pension received is a mix of the return on investments and the principal amount. For some, the fact that they are being taxed on investment return might be acceptable but to be taxed on the principal portion seems to be more than unfair.
There are certain restrictions imposed on the National Pension Scheme which makes it a less attractive option of investment. A person can maintain only a single NPS in his lifetime. Further, a subscriber to this scheme cannot invest more than 50% of his total investment in their NPS account towards the equities.
The returns in such schemes are often prone to risks whereas in other options like Bajaj FD the nature of investment is risk-free and the interest rate is up to 6.8%. it can also go up to 7.055 for senior citizens. One may also open multiple Bajaj FDs unlike the restrictions mentioned here. Investments are generally meant to serve the long-term objectives and one financial goal which is common to all investors is retirement.
The National Pension Scheme seems to serve that purpose. However, due to its nature, it might not be suitable for some and create disadvantages for many. If given an option then it is important to understand the choice of your requirements wisely before investing in such schemes