Should you invest in NPS?

 

National Pension Scheme (NPS) is a retirement scheme. You can contribute to it voluntarily and build a corpus. This will be invested in the markets and the returns will get added to the corpus. It is a scheme to ensure pension post retirement.

Source: http://www.npstrust.org.in. NAV as on 31^st Jan, 2019

Performance of NPS Schemes
How have NPS schemes fared?

NPS schemes (Scheme E) that invest more than 50% in stocks have not fared well in the short term as the market has been volatile. On the other hand they have performed well for the longer term.

NPS schemes that invest in government securities

(Scheme G) have performed well both in short-term and long-term.

As per recent changes, the investment in equity can go up to 75% in active subscription for non-government subscribers. This means potential to earn even higher returns and beat inflation is possible.

Taxation

As per the new proposal, 60% of the total amount that is allowed to be withdrawn after the age of 60 will be fully tax exempt from April 1, 2019. The other 40%  has to be invested in an annuity plan for getting regular pension payouts.

The new proposal makes it similar to products such as PPF which also does not have any tax on withdrawal as per schedule.

Investment up to an additional amount of Rs. 50,000 can be claimed as deduction if invested in NPS apart from 10% that qualifies for deduction under Section 80CCD. But this benefit comes with a clause of a 3-year lock-in period unlike other products such as EPF or PPF.

Liquidity

You cannot exit from the product anytime you wish. Premature withdrawal is allowed under certain conditions –

• You should be an NPS subscriber for at least for 3 years.
• The withdrawal amount should not exceed 25% of the contributions made by the subscriber.
• Withdrawal can happen only a maximum of three times during the entire tenure of subscription for specific reasons such as higher education or marriage of children, purchase or construction of the residential house (in specified conditions) and for treatment of critical illnesses.

The annuity product that you have to invest in may not be the product you want to buy. Usually annuity products have low returns. So NPS is a partially liquid investment.

Conclusion

NPS has become a more attractive product as –

• You can invest up to 75% in equity and
• There are options for partial withdrawal

NPS is at a disadvantage as –

• It involves a compulsory purchase of annuity product
• Returns from annuity product are taxable.
• You have to bear risks such as credit risk and low returns in case of Schemes G and C that invest in government securities and corporate debt respectively and market risks in case of Scheme E

You can allocate a part of your investment portfolio to NPS but ensure that you have a combination of equity mutual funds, debt mutual funds and PPF to have a well-diversified retirement corpus.

Key Takeaways

• As per the new ruling,  the NPS withdrawal  of 60% is tax-free.
• NPS returns (especially of the equity schemes) can beat inflation if market conditions are appropriate
• Invest in different products such as EPF, PPF, equity funds, debt funds and NPS to have a diversified portfolio that can give you the best returns.