The National Pension Scheme is a pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). This pension programme is available to all the employees from public, private and even the unorganized sector on a voluntary basis. For anyone who works in a private sector has an immense value of the scheme who require a regular income after their employment. This scheme encourages them to invest regularly during their course of employment, the benefits of which can be availed in the form of regular monthly pension post retirement. This scheme is transferable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.
Structure of NPS:-
Contrasting to the way the traditional financial instruments work where all the functions are handled within one company, the NPS has an unbundled structure of functioning.
NPS – Tax Benefits: –
At the time of maturity:-
- Full Withdrawal
- Employee – 60% of total is exempt
- Self Employed – 60% of total is exempt
- Partial Withdrawal –
- Employee – 25% of Employee contribution is exempt
- Self Employed – Fully Taxable
- In case of death, the maturity amount is not taxable under section 80CCD (3).
Advantages of NPS: –
- Diversification – One of the biggest benefit of the scheme, is that, it diversifies the funds allowing the subscribers to invest in equity as well as debt market.
- Return on funds – the funds are managed by the professional fund managers, which ensures optimum return on the investment.
- Various Schemes – In NPS, there is option between, Auto choice and Active choice. Active choice allows you to select the asset allocation as per the age and risk profile. Whereas, if you are new to investments, then you can go with Auto choice. This option automatically adjusts the funds between government securities, corporate bonds, and equity as you age. There is also an option to the subscribers to switch between the two options.
- Convenience – Most of authorized banks facilitate online application for NPS account. The subscribers have to submit the online form along with the required documents. Once the account is opened, they will receive a 12-digit unique Permanent Retirement Account Number (PRAN), which remains same throughout life irrespective of switch in the employment.
- Regulations – All the investments of the NPS scheme are regulated which facilitates the subscribers to earn better returns along with security of their funds.
Disadvantages of NPS:-
- Withdrawal Limits – subscriber willing to make withdrawal before maturity can apply provided that he fulfils various conditions. This creates a hassle for them.
- Taxation at time of maturity – 60% of the maturity amount is tax free and rest is taxable. Comparing this scheme to other financial instruments whose maturity proceeds are not liable to tax, this scheme is perceived as having less advantage than those.
- Limit on equity investment – The scheme offers Active choice to customise the asset allocation. But it restricts the equity exposure up to certain limit. The subscribers aiming for higher returns see it as a significant drawback.
The National Pension Scheme, even though being a secure mechanism for investment has its own drawbacks which may contradict with the interest of the subscribers or may not fulfil all their requirements. Not being able withdraw their funds before maturity, limited exposure, partial taxation are some hassles which the subscribers have to face. However, most of restrictions are put in place to attain the retirement objective of the scheme.
With easy access, secure investment options, investment diversification, National Pension Scheme is a desirable investment instrument for people having requisite of regular income even after retirement.
(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)
CA Hardik Patel