National pension scheme or NPS is a social security instrument by the government. This pension scheme can be opened by employees from private, public, and unorganized categories except for those from armed forces. The instrument encourages you to invest in the pension account at periodic intervals during your employment. Once retired, you are provided a specific portion of corpus in lump sum while the rest is offered as a monthly pension.
Check out some important features about NPS scheme:
- Inflation protection
In NPS, there is no capital protection because a specific amount is invested in equities. Returns of equities are market linked. However, being an asset class equity has the potential to outperform inflation and other fixed income securities by a huge margin over the long run. Thus, inclusion of equities in NPS helps build a certain level of protection against inflation.
- Partial withdrawal allowed under specific conditions
While NPS restricts withdrawal until you turn 60, the instrument gives flexibility to make partial withdrawals. After 3 years of staying in this program, you can withdraw up to 25% of the amount contributed to meet certain expenses. Such expenses are purchase or construction of your first home, children’s education or wedding, treatment of serious diseases of self, dependent parent, spouse, or children. NPS regulation has defined 13 critical diseases and has extended this scheme to accidents or other life-threatening diseases.
Point to consider here is the 25% limit will be computed on the amount contributed and not the account balance will be available. Suppose you contributed Rs 3,000 per month for 5 years, you will be allowed to withdraw Rs 45,000, i.e., 25% of Rs 1.80 lakh. You are allowed up to 3 withdrawals during the scheme tenure.
- Lump Sum withdrawal of up to 60% allowed on maturity
As per the NPS norms, lump sum withdrawal from NPS scheme at reaching 60 years of age is allowed. You can also delay this withdrawal until you reach 70 years of age. Note that a withdrawal of up to 60 percent of your corpus is allowed, which does not attract any tax. However, it is mandatory for you to use the rest of the 40 percent of the corpus to buy an annuity, which provides a monthly pension to you after retirement. Taxation for the 40 percent takes place based on your tax slab when the pension payout happens.
- Taxation benefits
In NPS scheme, a maximum of Rs 1.50 lakh of the investment per year is allowed for tax deduction under Section 80 C. Additionally, you can claim tax benefit up to Rs 50,000 as per Section 80CCD (1B), which permits an overall deduction of up to Rs 2 lakh.
Conclusion
Consider investing in NPS if the above elaborated feature matches your investment goal and risk profile. However, if you are open to take higher equity exposure, you can opt for the mutual fund route. In case you are a conservative investor and do not want any equity exposure, you can consider investing in PPF (public provident fund) to form your post retirement corpus. However, remember that PPF does not provide inflation beating returns like NPS.