NPS: A Better Tax Saver Than A Retirement Fund Builder


Are you saving for your retirement? If you are in your mid or late 30s and your answer is 'no' then it's a high time you should start investing. Many people think they are going to retire in their late 60s so they have plenty of time to start investing. The reason, you need a longer time span for retirement planning is that you have to save a huge corpus which will come to your rescue when your fixed income (salary) stops. Therefore, you have to think of inflation which will be much higher than it is now which will considerably reduce the value of your money.

To stay above the inflation you will need plenty of time. Hence, starting early is the best way to go about your retirement planning. Amongst many investment alternatives like a mutual fund, direct equity investment there is also an option of government-supported National Pension Scheme (NPS). There are a lot of opinions about NPS, at the same time, there are many people who totally rule it out from their investment portfolio.

Let's take a look at NPS, its features, advantages and drawbacks.

What is NPS?

National Pension System is the most famous Government supported pension scheme which is open to all the Indian citizens between the age group of 18-60. Launched in 2004 by Pension Fund Regulatory and Development Authority (PFRDA). NPS was initially only for the government employees, however, in the year 2009, after revising the rules of the scheme the scheme was opened for all the citizens of India.

The minimum annual contribution for this scheme is Rs.1,000. In the earlier stages of the scheme, the minimum contribution was Rs.6,000. NPS allows you to invest on a regular basis in a pension account during the period your employment. At the time you retire, you can liquidate a part of the amount that you have saved over the years while the remaining portion goes into buying an annuity scheme through which you get a lifelong pension.

Is It Good For Retirement Investment?

NPS is an investment medium created especially for retirement investment. However, on this counts, NPS fails miserably. To create a good retirement corpus you can't rely on any instrument that does not give 100% equity exposure. Equity investment is the critical element of the long-term investment.

NPS does offer equity option in the asset class E, but it only allows 50% exposure and the rest of your fund is invested in debt funds. Besides, there are stringent restrictions on withdrawal in the tier-1 account which limits investors' option to withdraw either amount at the end of the term and invest it in other better options which can give better returns like a mutual fund. Moreover, it's not any nominal amount but 60% of your corpus which you never get back.

In case investors get the entire amount in full they can invest it in better mediums i.e. mutual funds which will give them far higher returns compared to what the annuity scheme may give. Moreover, the biggest problem of the annuity is that it is wholly taxable. These are some of the points which make NPS an investment option which is not good enough to meet the retirement goals.

NPS: An Efficient Tax Planning Tool

Though NPS is not a good retirement investment alternative, the thing which makes special is its tax-saving ability. NPS allows not one but two tax deductions under 2 sections - Rs.1,50,000 under Section 80C and Rs.50,000 under section 80CCD. 

However, you need to plan your tax intelligently to make full use of it. To save tax section 80C go for tax-saving alternatives that not just save tax but also give better returns. ELSS is a fine example of that. In ELSS, you get a short locking period is of 3 years which is the shortest in any tax-saving medium. On top of that, your funds are invested in equity which increases the possibility of getting better returns than PPF and NPS. Therefore for deductions under Section 80C, you can choose a smart option like ELSS while for Section 80CCD, you can invest in NPS. The duel tax advantage is the biggest bonus of NPS, however, that's the only benefit of National Pension Scheme.