Every individual should consider retirement planning an important part of financial planning to ensure a continuous flow of money after retirement and have a secure future. Even though there are various plans available in the market to help you in the process of accumulating retirement funds. The NPS (National Pension System) is considered as one of the most lucrative investment instruments for retirement planning in India.Read more
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The investment in NPS is mainly focused on generating capital for the retirement of the investors as well as providing them a pension. Moreover, NPS offers an assured annuity for the investors along with the benefit of tax saving similar to EPF and PPF.
The NPS scheme is specifically initiated by the government of India, to secure the life of the individuals after retirement. The scheme is regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). You can invest in the NPS through two different options i.e. active choice and auto choice. The option you choose for minimum NPS contribution decides the allocation of assets of your investment.
Let’s read further to know how NPS is a profitable investment instrument for retirement planning.
A part of the contribution made towards NPS goes to equities. Even though investment in equity might not offer guaranteed returns, however, the returns offered by the equity investment are much higher as compared to other traditional tax saving investment options. NPS offers a profitable rate of return which helps you to create wealth in the long-term. Moreover, NPS also offers the facility to change the fund manager in case you are not satisfied with the performance of the fund.
NPS offers tax benefits similar to EPF and PPF. NPS is a EEE (exempt, exempt, exempt) product, which means that the contribution made towards the scheme, the maturity proceeds, and the interest earned on the invested amount are not liable for the tax. The deduction up to Rs.1.5 lakh for your contribution as well as for the contribution of the employer can be claimed under Section 80C of the Income Tax Act. Moreover, U/S 80CCD1(B) an additional tax benefit can be claimed on the investment of Rs.50,000 over and above the investment in NPS. Thus, you can avail of a total tax benefit of Rs. 2 Lakh under the scheme.
For the National Pension Scheme, currently, there is a limit in the range of 75%-50%on the exposure of equity securities. For government employees, this limit is 50%. In the given range, the equity share will reduce by 2.5% every year starting from the year in which the investors turn 50 years old. However, for 60 years old investors and above, the limit is fixed @50%. This balanced the equation of risk and return in the interest of the investors, this means that the fund invested towards the scheme is safe from the volatility of the equity market. The potential to earn returns on the NPS scheme is higher on contrary to the other fixed income schemes. Moreover, as a low-cost investment product, NPS also offers the benefit of the power of compounding to the investors.
NPS offers you the flexibility to choose among different asset classes- active and auto. Under the active choice, you can decide by yourself the allocation you want to distribute in different asset classes. In auto choice, the investment is categorized automatically under moderate, aggressive, and conservation funds depending on the age of the subscriber. The allocation under active choice will not change with age and remain the same until you decide to change it.
There are mainly two types of accounts offered by the NPS- Tier I and Tier II. The tier 1 account is the default account whereas, tier II is the voluntary addition. You can make a minimum NPS contribution of Rs.500 towards the tier I account and NPS minimum contribution of Rs.250 towards the tier-II account. However, there is no upper limit on the maximum investment in the scheme, it is mandatory to invest a minimum of Rs.6000 in a financial year.
On contrary to the belief of the investors, you cannot withdraw the entire accumulated amount of NPS scheme after retirement. After the maturity of the scheme, you can only withdraw 60% of the accumulated fund whereas, it is mandatory to purchase the annuity from the rest 40% of the accumulated fund. With this withdrawal rule, NPS not only provides you with a financial backup but also ensure that you have a continuous flow of money after retirement.
As a retirement scheme, you are obligated to continue investing in the NPS scheme until the age of 60 years. However, in case of any emergency, you can make premature withdrawal of up to 25% of the accumulated fund after completion of 3 years of the scheme. You can withdraw maximum up to 3 times in the time gap of 5 years during the entire tenure of the NPS scheme. However, it is important to keep in mind that these rules are only applicable to the tier-I account and not on the tier-II account.
Investing in the NPS account can allow you to have a secure future and a concrete plan of action ofr your retirement. Thus make sure that you include NPS in your retirement planning fund option if the above-mentioned benefits match your investment goal and risk profile.
*All savings are provided by the insurer as per the IRDAI approved insurance
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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