InvestorQ : What are the pros and cons of investing in National Pension Scheme?
nishi Shah made post

What are the pros and cons of investing in National Pension Scheme?

Answer
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Anushri Vasa answered.
3 months ago


NPS is a government-sponsored pension scheme that allows subscribers to contribute regularly in a pension account during their working life. The scheme is aimed at providing the investor with retirement benefits and is mandatory for government employees. It has several benefits, however, it has some negative points as well:

Pros:
Tax Saving: The biggest advantage of investment in NPS is the saving of tax. One can claim additional tax deduction under section 80CCD (1b) if they have already exhausted the ceiling of Rs. 1.5 lakh under section 80C. This means for an investor in a higher tax bracket, they can save up to Rs. 15,450 in their tax liability.

Automatic rebalancing: Generally, financial planners are of the view that investors should rebalance their portfolio at least once in a year or after any major market development. The NPS offers this advantage to investors and they can choose from three lifecycle funds available under NPS – aggressive (with 75% allocation to equity), moderate (with 50% allocation to equity), and conservative (with 25% allocation to equity). The portfolio gets rebalanced automatically every year on the birthday of the investor.

Best performing pension funds: If you look at the performance of NPS over several parameters, it is one of the best performing funds. We cannot really compare the performance based on returns as NPS returns do not reflect actual returns for the investors as the portfolio under NPS is generally a mix of 2-3 different classes of funds.

Cons:
Not fair to Tax annuity: The 60% corpus that one could withdraw on maturity is tax-free. However, 40% of the corpus has to be compulsorily put into an annuity to earn a pension that is fully taxed as income. This simply means that an investor does not save tax on NPS but only defer the same.

Lock-in-period: The lock-in-period of NPS can appear to be really long for the young investors as they will have to wait for 20-25 years to bring back the money they have invested. This makes them disinterested in such an option. Therefore, making it less relevant for the millennials.