NPS: Should you Invest or Not?

NPS

NPS has been evolved as a good financial product for retirement planning. The government is trying to make it more attractive by giving extra tax benefits to the investors. The Finance Minister has announced 40% of the total maturity amount is tax-free.

As you are already aware of the financial planning steps, you have to do the planning for your retirement also from the very beginning of the career. Although, there are various instruments to save tax are available in the market, NPS is one of the attractive products for financial planning for the retired life. Those who are self-sufficient and can manage their money well they may avoid the pension plans.

What is NPS:
National Pension System (NPS) is a voluntary, retirement savings scheme through systematic savings during their working life. Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime.  The scheme is structured into two tiers:
Tier-I account:

This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.

Tier-II account:

This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber.  The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.

It can be valid across all jobs and locations. This is regulated by PFRDA (pension Fund Regulatory And Development Authority).
At the time of exit, subscribers may withdraw the lump sum amount or may convert the amount to an annuity fund to withdraw as monthly pension or combination of both.
Tier-II account may be converted to Tier-I account, but vice versa is not possible.
 
Tax Benefit:
From the FY 2015-16, 10% of the salary contributed in the NPS is eligible for a tax deduction up to Rs.1.5 lakh under the section 80 CCD and above this, you get an additional deduction ofRs.50,000, taking the total deduction benefit to Rs.2 lakh.
Although you will get an extra tax deduction for what you invest in NPS, the maturity up to 20% is still taxable. You have to invest 40% of the corpus into an annuity fund which will give you a monthly pension. Another 40% of the corpus is tax-free and rest 20% of the corpus is taxable. This 20% amount shall be tax-free if you invest it into the annuity fund. The annuity fund can give you 5-7% return which is less respect to other investments.
Under the EPF, PPF you get a deduction of only up to Rs.1.5 lakh under section 80C. But the maturity amount from it is tax-free.

NPS maturity corpus is taxable. This means you have to pay income tax on the 20% that you withdraw from NPS. The annuities that you get are again considered as income and are taxable.

Returns

So now the question is, should one open an NPS account to avail the additional 50,000 tax deduction?

Suppose, You invested 50,000 a year in NPS for the next 30 years and get a return of 10%. You will get Rs. 86.64 Lakhs before taxes.

If you have invested 20% of the maturity amount into the annuity fund, it will be tax-free. So you have the maturity amount at the retirement age is Rs 86.64 Lakhs.

In the other way, assuming you are in the highest tax bracket i.e. 30% and you have left with Rs 35,000 for investment.

Now, you invest this in an equity mutual fund for 30 Years at 12% return (Min). You will get Rs. 89. 87 Lakhs.

Paying the tax and investing in equity mutual funds, you will be able to beat NPS return.

NPS- Should you invest or not

Should you invest?

The NPS is a good product because of its low expense, equity exposure, disciplined investing for the retirement from the beginning. At the same time, it has created some negative points such as

  1. It has a very long lock-in period. If you start investing at 30 years age, you have to wait for another 30 years for maturity and that too is not the full extent because 40% is to be put in an annuity. Poor liquidity is the biggest issue which NPS is dealing with though there is an option of partial withdrawal.
  2. 20% of the maturity amount is still taxable. Though it can be tax-free, if you convert it to the annuity.
  3. The annuity products are giving 5-7% return during the retirement age. That amount is again taxable. Even if you are gaining more, the low interest of annuity is restricting you from taking the benefit.

Also Read: Features and How to Apply Atal Pension Yojana Online

NPS Vs PPF: What Should You Select for Retirement Planning

Hence, please do not Invest in National Pension Scheme to save Tax only. However, if PFRDA withdraws the mandatory limitation of saving the maturity into an annuity fund, NPS will be an attractive retirement scheme due to its lower expense and equity exposure.

However, Those who are not very interested in managing their money at the old age and want to depend on the NPS to have a regular or monthly pension in their hand they can consider the NPS as an investment option. You want to open NPS account and don’t know how to do. Here is the guide to open an NPS account.

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