National Pension Scheme : Long Term, Illiquid, Taxable
What is National Pension Scheme?
Pension Scheme is launched by Government Of India where a particular amount is invested regularly till the age of 60 years and a lump sum is received at your retirement and a fixed monthly income for lifetime. Investments are market linked and asset classed are predefined by the government which are into government securities fund, fixed income instruments and Equity Funds.
NPS deductions comes under section 80CCC & gives deduction upto 1.5lac under the overall ceiling of section 80C. The only attraction of this scheme is that it gives an additional tax deduction of Rs. 50000 which puts the overall deduction upto Rs. 2 lacs This scheme is specifically designed for risk averse people, though the scheme is market linked but allocation of investment in the asset classes happens on the basis of your age. The more your age, the less weights of riskier assets will be applied to your investment giving you less returns.
Example : A youth aged 18 years wants to invest Rs. 1000 per month will have to compulsively invest for 42 years i.e., till the age of 60years.The Pension wealth on retirement would be Rs. 504000 and as per the rule 40% i.e., Rs. 201600 of the pension wealth is to be kept invested in life annuity on retirement which gives you less flexibility in your investment.This investment should be totally discarded by the youth.
Criteria & Issues of NPS :
• Age Bracket of 18years to 55years
• Minimum Investment : Rs.6000/year, Fund Management Charges : 0.009%
• Risk option : Investment in Equity to the maximum upto 50% The older your age the less investment in Risk bearing products like Equity, Government securities, Corporate Debt etc which provides returns between 8-10%
• Exit option : Withdrawal at the age of 60years but only upto an extent of 60%, rest 40% has to be invested in an annuity with IRDA.
• Premature Withdrawal can be only at an extent of 20% of the accumulated savings rest 80% to be invested in an annuity.
• The Withdrawal amount is taxable
• Returns on NPS are not guaranteed and returns gained are taxed as capital gains
• Funds change option is restricted to only once in a year
Investment Ratio Example : Mr. X aged 40 years wants to invest Rs. 10000 in NPS. Since his age is on a higher side the asset allocation will be as follows :
– Equity portion 40%, (Return : 12-14%)
– Credit Risk portion 25% (Return : 8-10%)
– Government Securities 35% (Return 6-7%)
So to average out Mr. X can achieve a maximum return of Rs. 1000 p.a at ROI of 10% p.a
In my opinion it is better to invest your hard earned money into Balanced Mutual Funds having both Equity & Debt option, Systematic Investment Plans, Employee Provident Fund which can be withdrawable after a period between 2months to 58years or in Equity Linked Saving Schemes, Bank Fixed deposits, National Saving Certificates etc which have a 3 to 5 year lock in period.
To conclude NPS is not a better investment option since there are far better investments than NPS which give benefits of less lock in periods, flexibility, taxation benefits, higher returns and many more.