How to Choose the Best NPS Scheme: A Comprehensive Guide

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The National Pension System is a central government initiative for public or private employees or those working in unorganized sectors. Investors can voluntarily invest in this scheme and build a corpus for retirement. However, to enjoy the maximum scheme benefits, you must select the best NPS scheme that aligns with your financial goals, risk appetite, and investment horizon. The following sections will discuss how to choose an NPS scheme based on the above factors.

Understanding NPS Scheme Options

When opening an NPS account, the first step is to consider which type to open. Basically, there are two types of NPS accounts—Tier I and Tier II. Tier I is the primary account that anyone between 18 and 70 years old can open. However, Tier II is an optional account that Tier I account holders can open for greater flexibility. Explore the pros and cons of both NPS schemes to choose one that suits your flexibility requirements and expected returns.

Assessing Your Financial Goals

The NPS scheme you choose largely depends on your investment timeline and retirement goals. The earlier you start investing, the more time your investments get to perform and generate returns. Furthermore, financial goals determine the extent of returns expected and risk tolerance. The more urgent your financial goas are, the less risk you can tolerate and the better returns you expect.

Analyzing Fund Performance

Checking the asset’s past performance is crucial before investing in an NPS scheme. Although past fund performance does not guarantee high returns, schemes with a history of generating high returns also have higher chances of performing well in the future. Analysing the fund performance and the fund manager's reputation and experience are integral to market research, helping investors make informed decisions.

Examining Fund Manager Track Record

The Pension Fund Regulatory and Development Authority (PFRDA) authorises fund managers to manage fund investments in various securities. Under NPS, fund managers invest their money in various corporate bonds, equities, and government securities. Check the track record of fund managers and ensure they invest money according to your financial goals, investment timeline, and risk appetite. Researching their reputation, experience, and past performance is crucial to choosing the best NPS scheme.

Checking Fund Management Charges

NPS requires multiple fees and charges according to the fund manager’s criteria. These include registration charges, processing fees, transaction charges, annual maintenance fees, etc. Since these charges may consume a considerable amount from your returns, you must select one with minimal charges. Compare charges across different NPS schemes to minimize your NPS investment-related costs. Doing that will maximise your returns and help build a bigger corpus for retirement.

Reviewing Asset Allocation Strategy

Utilising the right asset allocation strategy is essential to achieve your financial goals. Most importantly, it would help if you chose a plan according to your age. For instance, people under 40 can be more aggressive with their retirement savings. Therefore, they can allocate more assets to equities with higher risks but better returns. However, those in their mid-40s or higher age groups must allot bigger fund portions to debt instruments. Besides, if you have heavily invested in equity and your corpus is still lean, you can be conservative with your funds’ security by allocating them to safer options.

Considering Tax Benefits

One of the primary advantages of NPS investments is the tax benefits it provides. Section 80 CCD (1) offers a tax deduction of up to Rs. 1.5 Lakh and Section 80 CCD (1B) offers an additional deduction of Rs. 50,000 according to the old tax regime. However, these tax benefits apply to Tier I NPS accounts only. Tier II NPS accounts provide more flexibility in terms of contributions and withdrawals, but they do not offer tax benefits.

Since tax benefits largely impact your savings and corpus, you must choose an NPS account type according to your preference. If you need more flexibility, go for a Tier II account. Otherwise, stay with a Tier I account to save on tax obligations.

Evaluating Exit and Withdrawal Options

When you invest in NPS for several years, the real benefit comes during superannuation. Upon retirement, a Tier I NPS account allows you to withdraw 60% of the accumulated corpus in a lump sum and invest the remaining 40% in an annuity. Based on this investment, you receive a regular monthly pension after retirement.

Apart from the exit options, also examine the withdrawal rules before maturity. You might need money for inevitable expenses like a critical illness, home purchase, child’s education or marriage, etc. Consider the flexibility of withdrawal options when learning how to choose an NPS scheme.

Assessing Customer Service and Accessibility

Another crucial factor to consider when selecting an NPS scheme is the ease of managing the account and the NPS provider’s customer service accessibility. Although you can easily manage your NPS account online, you might sometimes need an expert's help. In such circumstances, the NPS provider's customer service centre should be highly accessible and responsive through multiple communication channels.

Frequently Asked Questions

Q: Which scheme preference is best in NPS?

Auto scheme preference is the best in NPS. Expert and experienced fund managers manage asset allocation in these schemes based on their research and predictions. Unless you are a trained and experienced fund manager, choosing the active mode puts you at risk of making a bad decision.

Q: How do I select a scheme in NPS?

You can select an NPS scheme according to your risk tolerance, financial goals, investment timeline, expected tax benefits, etc. Compare various plans to learn how to choose the NPS scheme adequately.

Q: Which account type should I choose in NPS?

NPS accounts can be of two types – Tier I and Tier II. While a Tier I account offers higher returns and tax benefits, a Tier II account provides more flexibility for contributions and withdrawals. You must choose an account type according to your desired returns, tax benefits, contribution capacity, and withdrawal needs.

Q: Which NPS model is best?

The auto NPS model is the best, as experienced fund managers oversee asset allocation based on their research and predictions. While an Active NPS model allows you to allocate funds to your preferred assets, it can be a risky endeavor due to a lack of expertize

How to Choose a Good NPS Scheme?