NPS Your best bet if aiming for high returns with built in safety and tax benefits


National Pension Scheme (NPS) is a retirement savings account wherein the subscriber contributes for getting the benefit in his post-retirement period. Hence it is akin to a Provident Fund or any other Pension or a superannuation fund created for this specific purpose. Whereas as the objective of any Investment plan is to earn maximum returns and equity can provide an edge in this regard, such savings need to be protected mainly due to its actual purpose, that of providing support in one’s old age. It needs to be handled with a certain amount of caution.

The investment Guidelines set out by the Pension Fund Regulatory Authority while allowing investment in equity as an Asset Class, has rightly put a cap of 50% under the “Active Choice” approach thereby balancing the risk-reward equation to the benefit of the account holder. The NPS fund management is similar to a balanced Mutual fund which protects against vagaries of the equity markets but at the same time provides that extra possibility of a higher yield as compared to a fixed income instrument. Moreover, introduction of new aggressive life Cycle Fund in November 2016 allowing upto 75% equity for young investors and recent relaxation of rules allowing investment in midcaps fulfills the requirement of all types of investors.

Any attempt at increasing this cap further will render the fund vulnerable to negative returns in the short to medium term and can affect the accumulated corpus of those who are due for an exit from the fund in a down cycle. It is important to note here that the additional tax benefit up to a contribution of 50,000 per annum which an NPS account holder enjoys, over and above the normal 80C limit, ultimately contributes to the yield on investment. For an NPS investor in the highest tax bracket 30% of the Rs. 50,000 invested which comes to Rs. 15,000/- is being recouped in the same year by way of paying lesser tax to that extent.

This itself provides a tremendous boost to the yield part. Overall if one sees, NPS as a retirement plan has all the benefits one can aspire, be it retirement planning, tax benefit, and superior yield as shown by the earnings it has generated thus far in some of the asset class schemes of some of Pension fund Managers under the NPS. Moreover, it provides remarkable flexibility in terms of switching among Asset class as well as changing your Pension fund manager. Needless to say, a balanced fund approach seems to be in the interest of the account holders and may work out to be beneficial in the long run keeping in mind the basic objective of safe, secured and superior returns on savings.

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Mukesh Shah
Vice President | Sushil Finance

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