+91NPS or National Pension System is a voluntary market-linked savings scheme that helps you save for your retirement. NPS accounts can be opened with investments as low as Rs. 500 (Tier 1) and Rs. 1,000 (Tier 2). Indian citizens, as well as NRIs aged between 18 to 60 years, can subscribe to the pension scheme with minimal documentation. Moreover, NPS investments are also safeguarded through various regulations and come with tax benefits up to Rs. 2 lakh in a financial year. However, like any other financial product, NPS has its own set of limitations which should be kept in mind to make an informed decision.
Given below are a few key risks and challenges associated with NPS investments:
No guaranteed returns
Since NPS is a market-linked savings scheme, the returns on your investment are not guaranteed. They mainly depend on the amount of investment that you make, your asset allocation/scheme preference and the Pension Fund Manager that you choose.
Making regular contributions over a long period of time and starting early may help you make the most of your investment and build a substantial corpus for your retirement.
Lock-in period and withdrawal limits
The National Pension System (Tier 1) also comes with a three year lock-in period and has restrictions on withdrawals from the pension account. After 3 years, only partial withdrawals up to 25% of your contributions can be made for specific purposes such as buying a house, children’s education or serious illness.
Moreover, only three partial withdrawals are allowed in the entire life cycle or until the subscriber reaches the age of 60. However, these partial withdrawals from NPS are tax-free.
In case of an NPS Tier 2 accounts, there is no lock-in and therefore, no restriction on withdrawals. But, withdrawals from NPS Tier II accounts are fully taxable at the slab rate.
Even on maturity at the time of retirement, only up to a maximum of 60% of the accumulated corpus can be withdrawn, the remaining 40% needs to be mandatorily used to purchase annuity in case of NPS Tier 1 accounts.
Mandatory annuity investment and tax on annuity returns
Another limitation of investing in NPS is that on account maturity, you need to mandatorily invest at least 40% of the total accumulated corpus in annuity and the annuity returns per month are taxable as per the person’s applicable tax slab.
Also read: NPS Tax Benefits
Mandatory to provide digital life certificate every year
When you receive a government pension, you are mandatorily required to provide Jeevan Pramaan Patra (Digital Life Certificate) every year. Therefore, if you invest in NPS, you need to mandatorily provide your Jeevan Pramaan Patra every year in order to receive your annuity post retirement.
No tax benefits on NPS Tier 2 investments
There are no tax benefits on NPS Tier 2 investments. Even though there is no lock-in period for Tier 2 accounts and no restriction on withdrawals, the withdrawals from the NPS Tier II account are fully taxable at the individual’s slab rate.
Account opening restrictions
NPS also has account opening restrictions such as you can only open and maintain a single NPS account through a single NPS CRA login in your lifetime. While the PRAN is easily portable across jobs and geography, an individual only gets a single PRAN in the entire lifespan.
Limited exposure to equities
With the active option of NPS, you get to decide your asset allocation between equity, government securities, corporate bonds and other assets. However, the equity exposure can only be up to 75% of the total investment. This is often seen as a drawback by investors seeking higher returns. However, this maximum limit on equity exposure is there to prevent losses as equity markets are usually highly volatile and recommended for experienced investors and new investors with higher equity exposure may end up losing money.
Difficulty in choosing the appropriate NPS fund manager
Subscribers have to choose between the ten limited Pension Fund Managers available. Moreover, people who have limited knowledge and experience with equities, debt, securities, etc. may find it difficult to make an informed decision and hence, fail to choose the best NPS fund manager for their investments.
Know more about NPS Contribution and Investment Process
On a final note, like any other investment, NPS also has a few drawbacks. However, most of them have been intentionally put in place to meet the retirement objective of the scheme and thus, the government-backed pension saving scheme is one of the best options for people looking to build up a retirement corpus. However, knowing the advantages along with the risks and challenges associated with scheme can help you make an informed decision.
Important Notice: NPS Service Discontinuation on Paisabazaar. Read more
FAQs
Q. What is the NPS interest rate?
Ans. NPS is a market-linked pension scheme and therefore, the interest that you earn on your investment varies with market performance of the assets.
Q. Is there an exception when I can withdraw the entire NPS amount from my Tier 1 account?
Ans. If the total corpus in your NPS Tier 1 account is less than Rs. 5 Lakh, then you can withdraw 100% of the corpus.
Q. If I have invested in pension funds of private entities (non-government). Can I still invest in NPS?
Ans. Yes, investment in NPS is independent of your investment/contribution in any other pension fund.
Q. Can I have 2 NPS accounts?
Ans. No, a single individual cannot have more than one NPS account. However, you can choose to have an NPS Tier 2 account along with your Tier 1 account.
Q. What is an annuity?
Ans. An annuity is a financial instrument which offers a regular payment of a certain amount ofmoney on a monthly/quarterly/annual basis for the selected period for a given purchase price/pension wealth. In simple words, an annuity is a financial instrument that offers
monthly/quarterly/annual pension at a specified rate for the period you chose.
Q. How is annuity paid?
Ans. Monthly pension or annuity is paid through direct bank transfer to the subscriber’s account only via Annuity Service Providers.
Q. Can I withdraw money from my NPS account if I have been unemployed for more than 6 months now?
Ans. Unemployment is not a valid reason for which you can make partial withdrawals from your NPS account.