NPS – Should you invest in national pension scheme?- Part III
NPS – is it the best you can do with your money? Know more…
How do I withdraw money?
In a Tier-I account, if you decide to withdraw before the age of 60, you can only take out 20% of the amount. Rest has to be converted into an annuity that pays monthly pension. After the age 60, you can withdraw upto 60%, and convert the rest into an annuity. At the time of withdrawal of your pension (when you are 60 years of age), 60% of your money invested can be withdrawn as lump sum and the remaining 40% is converted into annuity. Tier-II accounts can be withdrawn at any time.
What are the tax benefits of NPS?
Tier-I NPS contribution enjoys the same tax benefit up to Rs 1.5L under Section 80C, along with other instruments like PF, PPF and equity linked savings schemes. In addition, another Rs 50000 contributed to the NPS in a year is tax-exempt. This saves you an additional Rs 15,500 if you are in the highest tax bracket.
Currently NPS falls under Exempt, Exempt, Taxable (EET), meaning that investing in NPS and the interest earned is exempt from tax. But you are taxed during withdrawal of your pension. There is a proposal to make withdrawal also exempt (like it is for PPF), which will make NPS much more attractive.
We look at the verdict on NPS based on 3 parameters – returns, ease of transactions and tax efficiency.
On returns, NPS equity schemes have delivered around 9.2%-9.5% since inception in 2009, compared to a Nifty return of around 9.7%. Thus, they haven’t really outperformed the market, the way several mutual funds have. But they have been superior to the PF.
On ease of transactions, NPS fares quite poorly, requiring paperwork to open an account, withdraw, etc. There are steps being taken to make it easier, but there’s a long way to go to make them comparable to mutual funds. That said, NPS is much superior to the PF in this dimension.
Tax exemption on withdrawal will make NPS on par or better than mutual funds. As of now, they are inferior to both mutual funds and PF.
In summary, your money is far better kept in the NPS than in the PF. But mutual funds are probably still the best place for your money, all things considered.
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