The Pros and Cons of India's National Pension Scheme: A Comprehensive Analysis of Benefits and Drawbacks for Government and Private Sector Employees

 

The National Pension Scheme (NPS) is a retirement savings scheme that was introduced by the Government of India in 2004. The scheme is designed to provide a pension income to individuals after their retirement, and it is mandatory for all government employees who joined service on or after January 1, 2004. Private sector employees can also opt for the scheme voluntarily.

 

 

Under the NPS, an employee contributes a minimum of 10% of their basic salary plus dearness allowance, and the employer contributes an equal amount. The funds are invested in various asset classes such as equities, corporate bonds, and government securities. The scheme is administered by the Pension Fund Regulatory and Development Authority (PFRDA), which regulates and supervises the functioning of pension funds and other intermediaries involved in the NPS.

 

One of the main advantages of the NPS is that it provides a retirement savings avenue for employees, which can help them build a corpus for their post-retirement years. The scheme is portable, which means that employees can continue their contributions even if they change jobs. This feature makes the scheme attractive to younger employees who are likely to switch jobs frequently. The NPS offers tax benefits to both the employee and the employer. Employee contributions are eligible for tax deductions under Section 80CCD(1) of the Income Tax Act, 1961, and employer contributions are eligible for tax deductions under Section 80CCD(2).

 

NPS - Market Related Scheme

However, the NPS has some disadvantages as well. The scheme is a market-linked scheme, which means that the returns are not guaranteed and are subject to market fluctuations. The scheme has a long lock-in period, and premature withdrawals are allowed only under specific circumstances. The annuity rates offered by insurance companies may not be attractive, and the pension income may not be sufficient to meet the retiree's expenses. The scheme offers limited flexibility in terms of choosing the investment options and the annuity provider.

 

The NPS offers two types of accounts - Tier I and Tier II. Tier I account is the primary account, which is mandatory for government employees and offers tax benefits. The Tier II account is optional and can be opened by individuals who already have a Tier I account. The Tier II account does not offer tax benefits and allows individuals to make withdrawals at any time.

 

The NPS also offers three types of investment options - Active choice, Auto choice, and Corporate choice. Active choice allows the investor to choose the asset allocation between equity, corporate bonds, and government securities. Auto choice is a default investment option that invests in different asset classes based on the investor's age. Corporate choice is offered to corporate subscribers and allows them to choose their own pension fund managers.

 

The NPS has been successful in attracting a large number of subscribers, and as of March 2020, the scheme had over 3.36 crore subscribers and assets under management (AUM) of over Rs. 4.06 lakh crore. The scheme has seen a steady increase in AUM over the years, and the government has made several changes to make the scheme more attractive to subscribers.

One of the recent changes made to the scheme is the increase in the limit of tax deduction under Section 80CCD(1) from Rs. 1.5 lakh to Rs. 2 lakh, which has made the scheme more attractive to investors. The government has also allowed partial withdrawals from the NPS for specific purposes such as higher education, medical treatment, and purchase or construction of a house.

 

The NPS has also faced criticism from some quarters, with some experts arguing that the scheme is not suitable for individuals who are risk-averse and prefer a guaranteed return. The scheme's long lock-in period and limited flexibility have also been criticized, with some experts arguing that the scheme should offer more flexibility in terms