Is NPS investment the right choice for you?

Retirement planning is essential to remain financially independent even when your income stops post-retirement. This is where the National Pension System (NPS) comes into the picture.

What is NPS?

NPS is a market-linked retirement saving instrument. The investments are directed to market-linked funds, as per your choice. The returns depend on the performance of the fund into which your money is invested. Upon reaching maturity, NPS promises a lifelong pension through annuities, thereby creating a source of income for you, the investor.

Benefits of NPS

NPS offers various benefits to its investors. Some of these include the following –

  • Ease of investment

You can open an NPS account online or offline. The minimum entry age is 18 years, and the maximum is 65 years. Even NRIs can invest in NPS to enjoy the benefits that this system offers.

  • Disciplined investments

Losing track of retirement planning is common, especially when you are younger. This impacts the sufficiency of the retirement corpus. But, with NPS, you can take a disciplined approach to retirement planning. Once you open an account, you have to invest at least Rs. 1000 every year to keep your account active. The maturity age is 60 years which you can extend to 70 years if you wish to stay invested. Thus, once you invest in NPS, you can steadily contribute towards your retirement corpus through disciplined annual investments.

  • Attractive returns

The scheme offers you a choice of four funds – equity fund, corporate debt fund, government securities fund, and alternate investment funds (AIF). The funds invest in market-linked securities as per their investment objective. Accordingly, you can earn market-linked returns from NPS investments.

  • Choice of investment strategies

There are two investment strategies under NPS – Active and Auto. Under the Active Choice, you manage your own investments by choosing the funds into which you want to invest the money. The Auto Choice, on the other hand, offers an automated investment strategy. These strategies, thus, make NPS suitable for all types of investors.

  • Flexibility

The scheme allows flexibility in the form of partial withdrawals and switching between funds or strategies. Partial withdrawals can be done from the 3rd year of investment, limited to 25% of the fund value. Moreover, you can switch between the investment strategies too if your preferences change.

  • Guaranteed pensions

After the plan matures, you can withdraw up to 60% of the corpus in lump sum. The remaining 40% of the corpus is then used to invest in an annuity product, which leads to a lifelong pension. There are different choices of pension payments, and you can even include your spouse to receive pension income in your absence.

NPS tax benefits

Besides the benefits mentioned above, the National Pension System tax benefits sweeten the deal further. NPS has distinct tax advantages, which are as follows –

  • Investments into the scheme qualify as tax-free deductions under Section 80CCD (1) of the Income Tax Act, 1961. The deduction limit is Rs.1.5 lakhs, including the deduction limit of Section 80C
  • If your employer contributes to the scheme on your behalf, the contribution would be allowed as a tax-free deduction under Section 80CCD (2). This deduction is also available under the new tax regime
  • Additional investments into NPS, up to Rs. 50,000, would be allowed as a tax-free deduction under Section 80CCD (1B). Thus, you can claim a deduction of up to Rs. 2 lakhs by investing in the scheme
  • Partial withdrawals are tax-free income
  • On maturity, you can withdraw up to 60% of the corpus as a lump sum amount. You will not have to pay taxes on this amount; it will be tax-free income in your hands

Thus, given the National Pension System benefits, including the tax angle, it can be a suitable retirement planning tool. So, make the most of these NPS benefits and start saving for your golden years.

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