NATIONAL PENSION SCHEME – CRITICAL APPRAISAL OF NPS

Let’s dissect the minute details of the positive and grey aspects of NPS. Let’s go step by step, to see if opening a fresh NPS ACCOUNT is the right recipe for your Savings Portfolio. Every Savings Instrument looks ROSY at the outset and We open an account IN GOOD FAITH and in a state of financial innocence.

1. NPS is offered by the Central Govt. and regulated by the PFRDA. It is meant to plan your Retirement Pension CORPUS and every FY, up-to TWO LAKHS max. is exempted from your Income tax, mainly under 80 C, along with other options like PPF.

2. Individuals in the age range of 18-65 years can open an account at listed POP locations, which can be located on its website ( enps.nsdl.com ) The classic form of NPS is the TIER ONE option.

3. Your INVESTED MONEY is locked until Age 60, beyond which a TAX EXEMPT WITHDRAWL of up-to 60 percent of Accumulated amount is possible. The rest 40 % stays with the Government, from which your Annuity Pension Income is generated. This principal amount portion cannot be recovered by you in your lifetime. It goes to your Nominee, after you expire .

4. The ANNUAL RETURNS are in the range of 8-14 % even in the Low Interest Regime, currently prevailing in other Savings options. Higher returns are possible only with a higher EQUITY ALLOCATION approved by you. Max 75 % allowed for Equity allocation.

5. The CHIEF LIMITATION is the LOCKING OF YOUR HARD EARNED SAVINGS, for a very very LONG HORIZON , and just 60 percent of your accumulated funds come back into your hands at Age 60.

6. MERITS of NPS :

  1. Higher Interest Returns possible up-to 14 %
  2. INCOME TAX 80 C exemption of TWO LAKHS max. per FIN. YEAR, is a regular Benefit.
  3.  NPS ACCOUNT is relatively immune from Stock Market Volatility compared to Mutual Funds. It is superior to MF in terms of Annual Returns.
  4.  Tax-free Interest Income is highest comparatively.

7. DEMERITS OF NPS :

  1. INVESTMENT HORIZON is very very LONG, running into more than 3-4 decades. Not suitable for the average Investor.
  2. 40 % of your FUNDS are available ONLY TO YOUR REGISTERED NOMINEE, after your demise. Not ideal for the UNMARRIED or DIVORCED INVESTOR, both situations are quite common these days.
  3. Someone else takes a BIG CHUNK of your NPS FUNDS, which is not the case with PPF – where the Maturity Proceeds are TAX EXEMPT and are fully refunded to you, as the original Investor.

Conclusion :

NPS is a good option only for those few individuals, who are GENUINELY RICH – as they have other Monetary Resources to NAVIGATE THROUGH the Tough Retirement Years …… but against that, the Average Person may repent over his 40 % LOCKED SAVINGS in NPS, after age 60, when he has stopped earning fresh money.

MY PREFERENCE from the TAX PLANNING perspective :

One should give a FIRST PREFERENCE for PPF DEPOSITS of max 1.5 Lakhs in the first place, for the sake of 80C Deductions and if there is excess Savings left over – the balance 50 Thousand allocation can go to NPS, compared to investing in ELSS category of MUTUAL FUNDS.

DISCLAIMER: YOUR INVESTMENT MENTOR may disagree with my selfless and yet CRITICAL ANALYSIS. Do not get confused with such diverse opinions. This is very very common in Money Markets. CONCEPT SELLING is the way the innocent Investor gets trapped. No expert gives a WHOLISTIC picture – like I have shared. I am not for fetching any Benefits, apart from Knowledge Sharing.

Dr. Dhananjay Shah
Ped. Practice of 40 years
FELLOW IAP 2006
Crusader @ IAP
Worthy Candidate for IAP PRESIDENT ELECT 2022
Call: 9898003607
Call: 9825478060

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