Advantages and disadvantages of NPS

The National Pension System is one of the most popular investment schemes for retirement planning. It is a government-backed investment avenue that allows you to contribute and save for your future. The scheme is managed by fund managers and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). However, like any other investment scheme, knowing the advantages and disadvantages of NPS is always wise.

Advantages of NPS

1) Diversification

Investing in NPS allows you to access four different asset classes viz. equities, corporate bonds, government securities, and alternate assets, potentially yielding good returns. Managed by professional fund managers registered with the PFRDA, the fund eliminates the need for your active involvement in day-to-day investment decisions.

2) Investment options

NPS offers you two investment options for managing asset allocation – Active choice and Auto choice. In active choice, you can customise the allocation among the four asset classes. Auto choice, however, offers three pre-defined portfolios - aggressive, moderate, and conservative – allowing you to choose based on your risk preference.

3) Flexibility

The greatest advantage of the NPS is its flexibility. You can switch between investment options (auto and active) up to four times a year without incurring any charges or capital gains tax. Additionally, you have the option to choose from 10 fund managers and can change your fund manager once a year.

4) Tax advantage

In addition to the ₹1.5 lakh deduction available under Section 80C of the Income Tax Act, you also receive an additional deduction of up to ₹50,000 on investments under Section 80CCD(1B) by investing in NPS Tier 1 scheme.

5) Steady flow of income after retirement

In your post-retirement years, you'll need a consistent income to cover your routine expenses. The NPS is designed with this need in mind. At maturity, you are required to purchase an annuity with at least 40% of your accumulated pool, ensuring a steady stream of pension income. The remaining amount can be withdrawn as a lump sum.

6) Convenience

You can seamlessly apply for NPS online by filling in the application form, uploading all your documents and making investments from the comfort of your home. You can contribute to NPS scheme at a frequency that suits you best, whether it’s monthly, quarterly, or annually.

Disadvantages of NPS

1) Partial tax exemption

At maturity, you can withdraw 60% of the accumulated corpus tax-free. However, the remaining 40%, which you will receive as an annuity, is taxable. Thus, it's important to note that NPS only offer partial tax exemption. This is a critical consideration for future planning.

2) Liquidity

The NPS scheme has a lock-in period but allows limited premature withdrawals. You can exit after five years, withdrawing up to 20% of the corpus, with the remaining 80% used for annuities. Partial withdrawals (up to 25% of your contribution) are allowed three times for specific reasons like higher education, marriage, home purchase/reconstruction, or medical emergencies, but only after three years in the scheme.

3) Limit on equity investments

After the age of 50 years, the percentage of equity exposure reduces by 2.5% every year. When you reach 60 years, the equity exposure is reduced to 50%. This can be unwelcome for investors looking for high returns.

Also Read: How to invest in NPS (National Pension System)?

Conclusion

Before investing, it is wise to consider both the National Pension System's advantages and disadvantages. Axis Bank has been designated as one of the Points of Presence (POP) to facilitate NPS investment. You can choose funds, investment options and fund managers, as per your requirements. Secure your old age now with NPS today!

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision