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What is NPS?
The National Pension System, or NPS, is a retirement plan introduced by the Government of India in 2004, and is regulated by the Pension Fund Regulatory Development Authority (PFRDA). With this retirement plan, money invested by you and others is pooled together and then reinvested into the market by professional fund managers vetted by the PFRDA. These investments are made in a diverse portfolio that consists of government bonds, bills, corporate shares and debentures. They accumulate over time and provide you with market based returns on your investments, which you can withdraw on your retirement.
Who should invest in NPS?
While NPS is available to all Indian citizens between the ages of 18-70, its end goal is to provide you with financial security on your retirement. Hence, it is best suited for people who are looking for a stable retirement plan and have a relatively low tolerance towards market risks. Moreover, NPS also provides tax rebates of upto Rs. 2 lakhs under Sections 80C and 80CCD of the Indian Income Tax Act.
NPS allocates a portion of the accumulated corpus to equity investments, which are exposed to market fluctuations, returns and risks. The percentage of your investments that goes towards these can be decided by you, within a few limitations. It is important that you decide the right option for you depending on your investment goals, earnings and living expenses, and most importantly, your risk tolerance.
NPS vs EPF
While both Employees’ Provident Fund (EPF) and NPS are managed by the government, there are some factors that make them different, and may be a differentiating factor when it comes to choosing which one you want to invest in. The similarity between these retirement plans is that they both invest your money across debts and equities.
The difference between them is that you do not get to choose your fund manager with EPF. In the case of NPS though, not only can you choose the fund manager, but you can also switch between fund managers if you are not happy with the performance of your funds.
NPS can be said to be a more evolved retirement plan that takes into consideration your age and risk appetite. It allows you to decide on the assets you want to invest in based on your return expectations.
NPS vs ELSS
ELSS is a form of equity mutual fund which allows you the benefit of saving taxes, on investments upto Rs. 1.5 lakh under Section 80C, just like NPS. However, with the NPS, you also have the option to save an additional Rs 50,000 under section 80CCD (1B). Also, on maturity, you have the provision to withdraw 60% of the entire corpus as a lump sum entirely devoid of taxes, while the remaining amount is used to purchase annuity. Since ELSS is entirely based on equity, it carries a substantial amount of risk, while NPS caps equity allocation at 75% which makes it comparatively safer than ELSS. Furthermore, NPS also allows you to invest in assets like corporate bonds and government securities, which are safer than equities. Therefore, if you are looking for a retirement plan which is secure and also lowers your taxes, NPS can be a good option.
NPS vs PPF
Public Provident Fund, or PPF, is another savings scheme that was introduced by the Government of India, and was designed to provide fixed returns, and is not limited to pensions, unlike the NPS, which is exclusively a pension savings scheme. Since NPS is market based and carries a certain amount of risk, the average returns are higher in the long term.
While it cannot be guaranteed that NPS is better than PPF, it can definitely be said that NPS can help you create a higher corpus in the long run which can help you secure your finances better.
NPS vs Mutual Funds
The National Pension System operates in a similar manner to that of a mutual fund, and invests your money in equities. However, unlike equity mutual funds, which are entirely based on equity market investments, NPS has a capping of 75% in the equity market, which makes it relatively safer to invest in. Furthermore, the tax savings on investments of up to Rs. 2 lakh, with NPS, also adds to the benefits, while any returns from mutual funds are subject to taxes. If you are looking to create a corpus that provides you with regular income on retirement, NPS should be the ideal choice because of the lower risk and tax benefits.To conclude, every investor has different goals for their investments and a specific mindset. You should always consult your financial advisor before you make any investment decision. If you are looking to have a stable and smart retirement plan that provides you with multiple benefits, you can choose to go with NPS by KFintech here at nps.kfintech.com.
