For Indian savers, the National Pension System (NPS) is good for retirement and low cost, but has some limitations. NPS is compulsory for government employees, who joined the government service after 2004 and it was opened to the private sector in 2009. Despite its many advantages, some of its limitations are not becoming very popular as a market oriented retirement product. Let us know what are the benefits and limitations of NPS ..
Benefits of nps
The pension you get under NPS depends on the performance of your investment. You can choose between government bonds and corporate bonds with equity capped at 75% of the fund. NPS contributions are eligible for tax deduction under Section 80C of the Income Tax Act, 1961, up to Rs 1.5 lakh as well as exemption up to an additional Rs 50,000 under Section 80 CCD (1B). While 60% of the accumulated wealth at maturity at the age of 60 is tax-free, the remaining 40% must be used to purchase an annuity (fixed pension) that is taxable. Some investors want to invest in mutual funds and insurance products as savings for their retirement. However, NPS is extremely low cost as compared to these. The pension fund manager’s fees at NPS are currently 0.01% and the proposed increase in the next round of fund manager licenses could bring them up to 0.09%, much lower than the fees for other financial products.
For example, the mutual fund expense ratio is 2.25%, while the charge on insurance policies is high. Market-linked unit-linked insurance plans (ULIPs) usually include premium allocation charge, administration charge, fund manager charge and mortality rate. Generally, the total charge in ULIPs is 2 to 3%.
NPS limits
Long lock-in period: If you started investing in NPS at the age of 35, your money will be locked for 25 years. You can make a partial withdrawal of up to 25% of this to cover expenses related to higher education or children’s marriage or treatment of coronovirus. So if you do not want to lock your money for a long time then NPS may not be right for you. “The combination of greater flexibility in terms of reinvestment and more tax breaks on withdrawals will go a long way in making NPS a preferred investment option,” says Adil Shetty, CEO of BankBorger. Also Read: Punjab National Bank: February 1 will not withdraw money from these ATMs of PNB Bank
