Is NPS a right pension scheme?

Pension plans provide financial security and stability during old age when people don't have a regular source of income. NPS is a defined contribution scheme, which is a low cost, tax efficient, flexible and easily accessible and portable retirement saving account, under two Tier systems, operate from anywhere in the country with a minimum annual total contribution of Rs 6, 000 for Tier I account, which is mandatory and a minimum annual total contribution of Rs 2,000 for a Tier II account, which is optional. The government pension funds, under the NPS, are managed by the SBI, LIC and UTI, while the non- government pension funds under NPS are handled by eight pension fund managers.

In 2009, National pension scheme (NPS) gives an opportunity to all citizens of India to invest and accumulate savings and get a lump sum amount as regular income through an annuity plan at retirement. The Pension Fund Regulatory and Development Authority (PFRDA) takes various initiatives from time to time in order to improve the operational issues in the National Pension System (NPS), like simplification of account opening and withdrawal, new functionality development under NPS architecture and grievance management.

PFRDA also recently allowed a new lifecycle fund under NPS. Under this scheme, an individual can invest up to 75 per cent in equities, till the age of 35 years under auto choice option. Under this system, the equity exposure begins to reduce from age 35. It is the best option for young and aggressive investors.

Returns of NPS funds over the last three years have been attractive in comparison to other pension products available in the market. Average return of NPS Tier-I account of five Pension Funds of asset allocated under three categories such as Equity-E, Corporate Debt- C & Govt. Securities- G from Jan, 15 to Jan, 18 delivered a return of 12, 9.67 and 9.5 percent, respectively, whereas benchmark index generated a return during this period all these categories of 7.31,7.97 and 6.56 per cent respectively.

NPS allowed withdrawals up to 25 per cent of the contribution amount for specific purposes such as including children's higher education or marriage, construction or purchase of the first house and medical treatment of self, spouse, children or dependent parents provided that you have contributed at least 10 years. A subscriber can withdraw thrice only for specified reasons during the tenure excluding for medical treatment. There should be a gap of at least five years between two partial withdrawals.

NPS allows an additional tax deduction for Rs 50, 000/ under section 80 CCD (1B) to individuals on investment in Tier I account over and above the limit of Rs 1.50 lakh under section 80C. Self-employed individuals who don’t have the option of EPF/NPS, should invest in 15 years, PPF accounts Rs 1, 50,000 per annum and may invest Tier I NPS account to avail additional tax benefit under section 80 CCD (1B). However, taxation on maturity and compulsory amortization of 40 per cent of the NPS corpus are the other concerns that prevent investors from investing in NPS beyond the tax deduction limit.