Why NPS may not be the right investment tool for you (2024)

NPS is a tool that is used to build a corpus to fund your retired life. It requires you to build the corpus gradually over the years. However, despite its numerous benefits, NPS may not be the right investment avenue for you. Read ahead to find out why.

National Pension Scheme, also known as NPS, is a retirement scheme offered by the Government of India that helps provide a retirement income. Any individual between the ages of 18 and 60 can invest in NPS. NPS is a popular investment tool as it offers a high rate of interest, fixed income and tax benefits, and other advantages. However, despite its numerous benefits, NPS may not be the right investment avenue for you.

NPS is not ideal for you if…

1. You don’t want your money to be locked in for an extended period of time
NPS is a tool that is used to build a corpus to fund your retired life. It requires you to build the corpus gradually over the years, and once you turn 60, use at least 40% of the accumulated amount to buy an annuity plan. This annuity plan gives you a monthly pension. The balance of the accumulated amount is given back to you as a lump sum. As you can see, this is a long-term savings plan. Hence, if you do not wish to lock away your money for a long time, you should not invest in NPS.

Also Read:A Woman's Guide To Managing Her Finances At Every Stage Of Life

2.Yourinvestmentstyle leans more towards equities
Everyone has an investment style that’s based on their risk appetite. If you have a higher risk appetite and want to put your funds in high-yielding investments, the NPS scheme may not be ideal for you. NPS allows you to invest in investment tools such as equities, debt funds, government bonds, etc. However, it only allows a maximum of 75% of your funds to be invested in equities. If you are an aggressive investor and want to invest more than 75% of your funds in equities, it is best to stay away from NPS.

3. You want the entire amount at the time of retirement
NPS is a pension plan that gives out a fixed monthly amount after your retirement based on the rate of interest at the time. If you are not interested in getting a fixed monthly pension but want the entire amount at the time of retirement, you should not invest in NPS. This retirement scheme only gives a maximum of 60% of your corpus as a lump sum amount. If you have other plans for your retirement savings, such as travel or your child’s wedding, that require you to avail of the entire amount, NPS is not for you.

Also Read:Five Must-Have Investment Instruments For Retirement Planning

4. You are not keen on leveraging tax benefits
Allocation towards NPS gives you tax deductions under Section 80C. However, the tax benefit is capped at 10% of your basic salary and dearness allowance. Deduction available under Section 80C, Section 80CCC and Section 80CCD(1) is limited to Rs 1.5 lakh in a financial year. Additionally, deduction of up to Rs 50,000 is allowed under Section 80CCD(1B). This Rs 2 lakh could be better utilised to set off against high-yielding investments such as Equity Linked Savings Schemes (ELSS) or repayment of long-term debt such as home loan principal.

Conclusion

While NPS offers a high rate of interest and the stability of a fixed income after retirement, the above reasons show why NPS may not be the right option for everyone.