Reasons to Invest in the National Pension Scheme (NPS)

Not everyone does sincerely plan for retirement days. However, those who do must consider different ways to maintain the same living standard as it is today.

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Because, will the twilight years of your life be happy or difficult it all depends on how huge is your bank balance in your retirement days?

Hence, sincere retirement planning is all you need here!

There are multiple options dedicated to the senior people in the society to keep them financially protected during their golden days.  National Pension Scheme being one of them has been gaining much popularity among the investors, especially the senior citizens.

But how effective NPS is?

Will the scheme be capable of addressing all the financial needs of the elderly people?

Will it cost more?

Well, there are endless questions that might pop-up into your mind if you are looking to secure the future of your parents or planning to spare a portion from your earnings towards the retirement days. In this article, we’ll discuss how the scheme works and why should you consider this investment option.

Let’s Begin with What NPS is?

National Pension Scheme, popularly known as NPS, is a government-owned social security investment option, designed for the employees of private, public or unorganised sectors. Through these schemes, the investors can invest a portion of their income at a regular interval. Once the retirement age approaches, the subscribers can withdraw a percentage of the financial corpus earned. The rest of the amount will be offered as a regular pension. One can invest as minimum as Rs 500 to no limit. The NPS contributions deposited further are invested in different securities, investment avenues and equity market accordingly. The current rate of interest applicable is 9%-12% depending on the scheme chosen.

The Types of Account under NPS

Under NPS, there are two types of accounts available, Tier 1 and Tier 2. Let’s know about them here:

Tier 1

Tier 2

It has a fixed lock-in period, until the age 60 years

Works as a voluntary savings account

Only partial withdrawals are allowed

Withdrawals are allowed

The contributions towards this account are eligible for tax deduction

No tax benefits are offered

No particular conditions applied

The subscriber must open a Tier 1 account to open Tier 2 account

Benefits of Investing in the National Pension Schemes

NPS provides a systematic savings avenue for those who want to secure their retirement days.  It also encourages developing a habit of savings for the golden phase of your life even from a young age. Above all, this scheme comes with multiple benefits that make it one of the most popular investment products among investors.

Here are the reasons you should consider investing in the NPS scheme in 2020:

It Works as a Source of Earnings for Life

As you retire, your source of earnings stops but the regular expense prevails as it was earlier. Not to forget, growing inflation has a harsh impact on every aspect of our lives. So, to maintain the same lifestyle as before, you’ll need a regular income. NPS offers that option in the form of pension for your entire retirement phase, thus, works as a saviour in the time you need the financial support the most.

Low Risk Investment

As compared to other investment options, NPS bears comparatively low risk. Moreover, being a govt.-owned scheme the risk cap ranges from 50% to 75% on the equities. Investors, who are at the age of 50, the risk exposure is 75%, which gets decreased by 2.5% by the time one reaches the age 60%. This equity exposure provides higher-earning opportunities with a lower risk exposure.

Flexibility of Fund Allocation

NPS scheme offers flexibility to design the fund portfolio as per the convenience of the investor. As per their risk appetite, the investors can allocate funds amongst four assets. These funds can be re-arranged at any point of time when the investor is unhappy with the fund’s performance or feels it is not working as expected.

Guaranteed Returns

Although a portion of NPS is invested in equities which may not offer an assured return, the overall returns from the NPS scheme are guaranteed. Also, the returns offered by these schemes are comparatively higher than other investments such as PPF or FDs.

An Affordable Investment

Also popular as one of the low-cost investments with higher return benefits, NPS can be a good pick for you. The contribution can be minimal, but the higher compounding feature of these schemes helps the investor to enjoy considerable returns at the age of retirement.

Save on Taxes

NPS offers tax benefits over and above Section 80C of the Income Tax Act. The contributions you made towards NPA are eligible for tax deductions up to Rs 50,000 under Section 80CCD (1B). Remember that, this is over and above the exemption, you can claim for investing Rs 1,50,000 under Section 80C. This way you can save up to a considerable additional amount on tax every year. However, to enjoy this benefit, the claim must be done only for the investments in NPS Tier 1 account.

Final Take Away!

How retirement days will treat you depends on how well you are prepared for it. Without a strong financial portfolio, we’re sure nobody is well prepared ever. You can reap the benefits of good investment decisions such as NPS at your later stage when you need the financial security in your life the most. So, invest today and stay prepared for your rainy days with a smile!

Written By: PolicyBazaar - Updated: 04 August 2021
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