The Government of India supports the National Pension System (NPS), a distinctive pension system that provides both equity and debt exposure in a single investment. Because it is guaranteed by the government, the NPS account holders have flexibility regarding their exposure to debt and equity, which provides some level of trust in the investors. This pension plan also promises a monthly pension post-retirement.
In response to the question of why the NPS scheme is becoming more popular with investors, Ajit Kumar, Chief Strategy Officer at KFintech, stated, "Because it is so simple and flexible, NPS is becoming more and more popular. Everyone who wants to invest in the NPS has the chance to do so because it is a voluntary contribution system."
Jitendra Solanki, a SEBI-registered tax and investment expert, commented on recent GoI actions that could increase the profitability of the NPS scheme "The GoI recently increased the FDI limit in pension funds from 49% to 74%. It has also approved the PFRDA's suggestion to let pension funds make IPO investments. These initiatives are going to help NPS account holders in long term."
Ajit Kumar of KFintech mentioned the following five factors as reasons why investors might choose this pension plan for a better return with minimum risk:
1. Freedom of Investment: You can contribute once at any time of the year, or you can do so every month. For Tier 1 and Tier 2 accounts, a minimum annual contribution of 500 and 1000 is required respectively. Changes to your investment amounts are also permitted, providing they remain above the prescribed minimum amounts.
2. Element of Trust: You can only ever have one NPS account, so even if you change jobs or move to a different place, your NPS account follows you. This is another benefit of NPS. Because the NPS is a government-backed scheme, there is a level of trust attached to it, which makes it all the more appealing. You may regularly monitor and assess the performance of your investment thanks to the PFRDA's oversight and regulation of the complete setup. A new product that NPS intends to provide in the next 6 to 8 months could help put an end to the debate on assured returns.
3. Freedom to choose your fund manager: You can decide where your money is placed and who manages it once you begin investing. Once a year, you have the option of switching fund managers if you're not satisfied. You have the opportunity to move between investment options twice a year if you're not happy with how things are going or if the results you see don't meet your expectations. The willingness to make risky investments declines with age and younger people are typically more prepared to take on more of a risk in order to earn larger returns on their investments. The NPS allows you to invest up to 75% of your corpus in equities for those who don't mind taking on higher risks. On the opposite end of the spectrum, those who prefer risk-free returns have the option to invest all of their corpus in Government securities.
4. Income Tax Benefit: You may be eligible for tax benefits of up to 2 lakhs for investing in NPS under several sections. It is true that the annuity pension you receive each month is taxable, but the same issues apply to other pension plans as well. For example, with EPF, once you receive your final settlement, you will need to invest it elsewhere and the returns on those will also be taxable.
5. Promise of a monthly income post-retirement: Up to 60% of your total corpus may be withdrawn as a lump sum after retirement, with the remaining 40% going toward the mentioned annuity plan. The lump sum that is taken out after retirement is also tax-free. NPS guarantees that there will be a pension at a later date even though it does not guarantee any specific percentage returns on your investment. Since all of this is made possible because of your own contributions to the NPS, it avoids an undue financial burden on the government, which does not have to contribute.
