Many look at NPS as tax saving instrument as NPS is eligible for deduction in taxable income upto the limit of 1.5L under section 80C. One can also avail deduction up to INR 50,000 beyond the 1.5L limit under section 80CCD. This makes NPS look like an attractive investment.
But is it?
NPS essentially is a retirement solution regulated by PFRDA (Pension Fund Regulatory and Development Authority). NPS is managed by Pension Fund Managers just like how your Mutual Fund houses have fund managers.
Since NPS is a retirement solution, it doesn’t provide good liquidity options.
With NPS, you can withdraw up to 25% of your accumulated NPS corpus within 3 years of subscription. However, this is available only for limited reasons – realestate purchase, construction of house, child’s marriage, education, setting up new business, or serious illness.
Only 40% of NPS maturity amount is tax free. You can withdraw 60% of NPS maturity amount after retirement but the rest has to be used for buying annuities.
Why is liquidity essential?
You might need money in future for various reasons. It could be illness or even urgent house repairs that can’t be delayed. Due to nature of withdrawal restrictions on NPS it makes it a bad investment.
Instead of locking your money that you can’t withdraw when you need it, smart investors instead buy mutual funds.
I also hate the fact that 40% of the corpus goes into buying annuity. If you or your SO dies, NPS will not pay the remaining corpus to your nominee. That’s money wasted. In Mutual Funds you can name nominees.
While Mutual Funds have no extra tax benefits they are more liquid in the sense you can withdraw money if there’s an emergency. In case you want to avail tax benefits, you can invest in ELSS Mutual Funds, which you can claim under sector 80C of IT Act. For ELSS Mutual Funds there’s a short lock-in period of 3 years. There’s also no forceful annuity. In case you don’t tax benefits and are looking for more liquidity, you can invest in Liquid Mutual Funds.
Low on Equity
Like I mentioned earlier, NPS is managed by Pension Fund Managers just like how Mutual Fund houses have Fund Managers. Government has tried to make NPS has an attractive model but if you are a young investor, ideally you should put more of your money in equity.
Typically when you are young, you should have more exposure to equities and when you get close to retirement you should have more exposure to debt.
With NPS, at max you can have 50% exposure to equities. In comparison, there are multiple Mutual Funds available with equity to debt exposure as you want.
I hope this helps you in making investment decisions. Just because NPS provides an additional INR 50,000 of tax benefit doesn’t make it a good retirement solution. There are multiple instruments available these days.
Make the right choice.