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What are the advantages and disadvantages of an NPS investment?

3 Mins 21 Nov 2021 0 COMMENT


Indian financial markets have several dynamic investment products – shares, bonds, commodities, government securities, insurance products, and the list continues. Each of these belongs to particular asset classes and comes with its highs and lows. One such asset category that is a great way to encourage regular savings grows your money and saves you from taxes are tax-saving investment products. A popular product in this category is NPS.

What is NPS?

National Pension Scheme or NPS is a compelling investment option. You make regular investments throughout your working years till you retire. On maturity, this scheme gives you lump sum returns as well as steady pension income. You can enjoy tax benefits when you make contributions towards this scheme and when you start receiving the returns.

Additional Read: 7 things you need to know about NPS

How does NPS work?

Any citizen (resident and non-resident) between 18-65 years can invest in this scheme. The funds you invest in this scheme are allotted towards four market-linked assets classes - Equity, Government Bonds and Securities, Corporate Debt, and Alternative Investment Funds. Depending on how aggressive or conservative your investment approach is, you can decide the proportion of funds you want to be allocated towards each asset class. The returns are market-linked, and the scheme is designed to give you maximum growth from the start and protect you from short-term market volatility towards the end of your scheme.

Additional Read: NPS Features & Benefits you need to know

Advantages of investing in NPS

Tax Benefits

That is one of the critical benefits that has made NPS investments popular. Under section 80C, you can claim a deduction of Rs. 1.5 lakhs towards your NPS investment. Additionally, there is another provision under section 80CCD (1B) to invest in NPS and claim a deduction of Rs 50,000. Hence you can effectively save Rs. 2 lakhs from taxes. The partial withdrawals, maturity withdrawals, and pension income are also exempt from taxes.

Additional Read: NPS Investments Tax Benefits

Control on Asset Allocation

Unlike other retirement investment products like PPF, etc., in an NPS investment, you have control to pick the pattern of asset allocation. Auto choice and Active choice are two broad styles of asset allocation. Irrespective of whichever type you choose, the over-arching strategy in NPS is wealth creation at the beginning of your plan and wealth conservation when you are close to retirement.

Additional Read: Overview of Active & Auto Investment Choices

Dependable source of Pension Income

NPS is a Government-backed investment initiative where the fund is managed professionally by the Pension Fund Regulatory and Development Authority (PFRDA). Hence your funds are in safe hands. You get a lump sum return on maturity, and with the remaining corpus, you have to purchase annuities. These annuities make way for a reliable source of regular pensions. In totality, the returns that you enjoy in NPS are better than options such as fixed deposits, PPFs, etc.

Low maintenance expense

The cost of your investment is meagre. The initial registration charges, annual charges for maintenance, servicing fees, transaction costs, etc., associated with your NPS investment amount to a low price compared to the charges in other financial investment instruments like mutual funds, stocks, securities, etc.

Disadvantages of investing in NPS

Extensive Lock-in period

The NPS investments structure of Tier 1 accounts is such that your funds are locked in till maturity. That associates an attribute of illiquidity to NPS investments. Generally, the investment matures when you turn 60 years old. But you can also extend the maturity till the age of 70. You can proceed with partial withdrawal before maturity for specific reasons like marriage, education fees for your child, medical costs, etc.

Compulsory Annuity Purchase

In NPS, when your investment matures, you get two components of returns – one is a 60% lump sum and the remaining corpus 40% is for annuity purchase. This annuity allocation is enforced and hence raises a few flags.


NPS comes with lots of unmatchable benefits and a few loose threads too. In case of any confusion, you should resort to your financial objectives as they can guide you towards the right investment instrument. If you have decided to opt for NPS, there are multiple ways to proceed – for starters, you can easily invest in NPS online. Registered brokers, banks, other financial institutions, and your employer (if you are a salaried individual) are other common ways to invest in NPS.

Additional Read: 5 Ways to Build a Substantial Retirement Corpus

Additional Read: 7 best tax saving options available for you

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  PFRDA registration numbers:  POP no -05092018. We are distributors of National Pension Scheme. Please note, National Pension Scheme related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.