Is it a good idea to invest in NPS

Modern working professionals increasingly understand the importance of retirement planning. If you too are searching for a safe and cost-effective retirement scheme, you might have come across the National Pension System (NPS). However, is it indeed a good idea to invest in NPS? Read this post to find out.

NPS was launched in 2004 to help government employees build a considerable retirement corpus and earn a regular pension. In 2009 the scope of the scheme was extended to private employees as well. With modern working professionals now understanding the importance of retirement planning, NPS has become a popular investment option.

The voluntary scheme allows its subscribers to invest throughout their working life. After maturity, one can withdraw a part of the investment in a lump sum and the remaining amount earns a regular pension. While the government continues to add more features and benefits to NPS investment online and offline, is it actually a good option?

Understanding some of its most important benefits can help you get a clear idea.

1. Professional management of portfolio

One of the biggest concerns for investors planning to invest in equity and debt markets is active management of their investment portfolio. Most investors do not have the right knowledge or experience to make changes to their portfolio as per the market conditions. Lack of time also proves a major hurdle.

As per the NPS details, the Pension Fund Regulatory and Development Authority (PFRDA) has authorised fund managers to manage the investments. This ensures that professionals handle your investment on your behalf.

2. Multiple investment options to suit investors

Currently, NPS has two investment options to choose from- Active and Auto. With Active Choice, you can select your own asset allocation across government securities, corporate bonds and equity. However, the maximum equity allocation can only be 50%.

With the Auto Choice, the asset allocation is automatically adjusted between government securities, corporate bonds and equity as per your age. Moreover, you are also allowed to switch between Active and Auto Choice for free, twice a year.

3. Tier I and Tier II accounts for flexible withdrawals

If you are searching for how to invest in NPS online, you might have come across Tier I and Tier II NPS accounts. What are these accounts? The most significant difference between these two accounts is how you can withdraw your money and the tax benefits.

With a Tier I account, you are not allowed to withdraw the entire investment until you reach the retirement age. Even after retirement, there are restrictions on how you can withdraw the money. Although there are certain conditions which allow you to withdraw your contributions provided you have a Tier account for 10 years or more. This can be for your children’s higher education, medical treatment of certain illnesses of self and dependent family members including spouse, kids, and parents, the marriage of kids, and lastly, for buying or constructing the first house.

There are no such rules or restrictions on withdrawals on the Tier II account.

4. Tax benefit on contributions

Since 2015, the government has introduced additional tax benefits on NPS investments. Under Section 80CCD (1B) of the Income Tax (IT) Act, NPS subscribers can get tax deductions of up to Rs <50,000> in a financial year. This deduction is above the Rs <1.5> lakh annual deduction limit that it receives under Section 80CCE.

5. Disciplined investing

Retirement planning is a long-term goal and needs a disciplined investment approach. With most of the popular investment options, investors often withdraw the money after a few years of investment. This makes it difficult for them to achieve their investment objective. However, with the NPS investment option, your investments get locked in until the maturity age of 60. By allowing you to remain invested for a long period, NPS is better able to help you achieve your retirement objective.

6. New government rules

Current Finance Minister, Nirmala Sitharaman, recently announced new rules making NPS quite an attractive investment scheme.

• On maturity, the entire 60% of withdrawn amount is tax-free. Earlier only 40% was tax-free whereas 20% was taxable.
• The contribution made by Central Government towards Tier I account of their employees will be increased from 10% of the employee’s salary to 14%.
• Contributions made in Tier II accounts will also be eligible for tax exemption under Sections 80CCE and 80CCD (1B) provided there is a minimum lock-in period of 3-years.

These announcements along with low expense-ratio of the NPS funds have made them quite a competitive investment scheme especially for those who are looking at building a strong retirement portfolio.

Should you invest in NPS?

Some of the most important NPS details and benefits are discussed above. Understand them clearly, and it shouldn't be difficult for you to decide whether or not NPS is the right option for you.

If you decide to go ahead with NPS, prefer an authorised bank that offers online NPS account opening for enhanced convenience.

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