NPS investment - a step towards retirement planning

August 08, 2020

NPS investment - a step towards retirement planning

Planning for retirement needs to start early. Start investing in the National Pension System (NPS) which is an initiative by the Government to ensure financial security post-retirement. Read further to know how it can help you plan your retirement.

Many people dream of having a happy and peaceful life once they retire. For this, you need to plan your retirement life to have enough money to last for a lifetime. Retirement Planning is a process of allocating savings for managing post-retirement monetary matters.

Building a substantial corpus needs to start early, and should possibly last for 30 more years post-retirement. You cannot just depend on savings. One needs to have a steady source of income generation, which is assured through various pension schemes. Pension plans provide financial stability when you do not have a regular income source. 

If you are unsure of investing in risky financial instruments, you can start saving in NPS. It is an initiative by the Indian Government to help create a retirement corpus. Whether you are a public, private sector, or unorganised sector employee, you can contribute to NPS investment online

The scheme allows you to start investments through Tier I and Tier II Accounts. Post the account opening, you receive a unique Permanent Retirement Account Number or PRAN. Whenever you contribute, you need to invest through PRAN.

Benefits of NPS:

It is a transparent and affordable scheme wherein you can know your investment value on a day-to-day basis. 

Introduced in 2009, NPS investment offers good returns at an interest rate ranging from 8% to 10% per annum.

The cap for equity exposure ranges from 75% to 50%. The equity portion tends to reduce by 2.5% every year from the time an individual reaches 50 years of age. The cap reduces to 50% if an individual is 60 years and above. This balances the risk-return ratio once you retire. 

NPS allows you to change the pension scheme if you are not happy with the performance.

As an investor in NPS, you can withdraw only a certain percentage of the amount. The rest 40% you receive in the form of monthly income. 

Tax benefits under the NPS

One of the reasons why people invest in the scheme is the tax benefit on NPS. Below are some of the ways in which you can claim tax deductions under different sections of the Income Tax (IT) Act.

Applicable Sections of the IT ActTax Deductions
Section 80CCD (1) An individual’s contributions in Tier I entitled for tax deductions up to Rs 1.5 lakh.
Section 80CCD 1(B) In addition to the tax deductions under Section 80CCD (1), the individual can claim tax deductions of up to Rs 50,000 for the investments in Tier I NPS Account.
Section 80CCD (2) Employees having Tier I investments are entitled to claim tax deductions up to 14% for Central Government contributions, and it is 10% for others. One can claim the deductions over and above the ones applicable under Section 80C.

Other tax-saving benefits for Tier I Investments include:

A person withdrawing 25% of the contributions from the account type is entitled to tax exemption.

If you are withdrawing 40% of the NPS contribution in lump sum, it does not attract any tax. 

In case you purchase an annuity from the NPS corpus, it is tax-exempt. Tax is applicable on income generated from the annuity plan.

If you are looking to plan for your retirement, start investing in NPS. This is a low-risk option that will help ensure you enjoy your retirement with financial ease.

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