NPS is a pension scheme in India. (Wikipedia says it is very close to 401(k) of USA). The basic outline of the scheme is as follows -
- NPS invests money in (E)quities (Max 50%), (C)orporate Bonds and (G)overnment Bonds.
- NPS provides an auto choice option, wherein based on the age of investor it shifts the investment percentage, till 35 years it invests 50% in E, 30% in C and 20% in G. As you age E tapers off till it hits 10% in E 10% in C and 80% in G
- NPS also provides manual choice.
- Has a lock in period for withdrawl. Can't withdraw money until age of 60. There are some scenarios where you can withdraw the money but let's assume all is well and it can only be withdrawn at the ripe age of 60
- Withdrawl - Minimum 40% has to be used to purchase an annuity. This is not taxed, only income received from annuity is taxed. 40% of accumulated NPS is tax free
- Tax benefits - Upto 50000 INR is tax free when invested here.
Why I want to invest -
- I fall into the highest tax bracket 30%, so if I invest 50000 INR then I can save 15000 INR.
- An oppurtunity to save some money with no default option to withdraw.
- Provides a pension, I currently work in an industry which has no pensions.
- Hopefully it will provide some lump-sum money that I could probably use to buy a house / kid's education / kid's marriage.
- As this is offered by government, rules might change in the future. It might either be for the good or the bad but given the current data is it a worthwhile investment?
- If yes, would be better to fix choice at 50% in E and 25% in C and G or go for the auto choice?
- I see many arguments in the internet saying that it is bad investment because if you put the same money into equity oriented mutual funds then you will get better returns. Since this is a pension based scheme wouldn't it be prudent to have some diversification into bonds and government securities? Am I wrong in thinking this way? If I am wrong, why is it?