Introduction :
The National Pension System (NPS) stands out as a potent tool for retirement planning in India, offering attractive tax benefits and the flexibility to build a retirement corpus according to one’s own financial acumen and appetite for risk. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS involves investing contributions into various pension funds.
Here are five crucial aspects you should consider before making your investment in NPS.
- Choose the Right Investment Option:
- Active Choice allows you to select your asset allocation (Equity, Corporate Bonds, Government Securities) based on your risk tolerance.
- Auto Choice offers predefined Life Cycle options (Aggressive, Moderate, Conservative) that automatically adjust based on your age.
Ensure you pick an option aligned with your risk profile and investment knowledge.
- Understand the Tax Benefits:
- Self-Contribution Tax Benefits to Employees
Employees contributing to NPS receive the following tax benefits on their own contribution:
Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD (1) up to Rs. 1.50 lakhs under Sec 80 CCE.
Additional tax deduction up to 50,000 under section 80 CCD (1B) above and beyond the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
- Employer Contribution Tax Benefits to Employees
Eligible for a tax deduction of up to 14% of (Basic + DA) by the employer under Section 80 CCD (2) over Rs. 1.50 lakh as per section 80 CCE.
- Self-employed get tax benefits
Self-employed contributors to NPS receive the following tax benefits on their own contribution.
Tax deduction up to 20% of gross income under section 80 CCD (1) up to an aggregate ceiling of Rs. 1.50 lakhs under Sec 80 CCE.
Additional tax deduction up to Rs. 50,000 under section 80 CCD (1B) above and beyond the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.
- Tax benefit on Annuity purchase
Tax exemption on purchase of annuity upon reaching age 60 or superannuation under section 80CCD (5). However, any later income from the annuity is taxed under section 80CCD (3).
- Know the Withdrawal Rules:
You can withdraw upto 60% of the corpus when the Tier I scheme matures. The remaining 40% must be invested in an annuity or pension plan from a PFRDA-empanelled insurance company. This doesn’t apply if the corpus amount is under Rs.2 lakh. In that case, you are able to withdraw the whole lump sum.
Partial withdrawal
Tax-free partial withdrawals of up to 25% of your own contributions are permitted after 3 years of operating an NPS account. You can make up to 3 withdrawals throughout your entire NPS tenure for specific purposes such as medical treatment, disability, children’s education or marriage, purchasing property, or starting a new business.
Premature exit
At least 80% of the subscriber’s accumulated pension wealth must be used to purchase an annuity, which will provide a monthly pension. The remaining 20% can be withdrawn as a lump sum. However, if the total corpus is ₹2.5 lakh or less, the subscriber has the option to withdraw the entire amount as a lump sum. Subscribers can exit the NPS only after completing a minimum of 5 years in the scheme.
Death upon exit
In the unfortunate event of a subscriber’s death, the nominee or legal heir has the option to withdraw the entire accumulated corpus. Alternatively, the nominee or family members can choose to use the corpus to purchase an annuity, if they prefer to receive a regular pension.
- Monitor Performance Regularly:
Keep an eye on how your investments are performing, especially if you’ve opted for Active Choice, where you control asset allocation.
Review your NPS fund’s performance annually or every few years to adjust your allocation if needed.
- Long-Term Commitment:
NPS is designed for long-term retirement planning, with benefits of compounding. Early withdrawals are restricted, making it ideal for disciplined investors.
Stay committed to NPS for at least a decade or more to enjoy substantial corpus growth, especially when investing consistently.
Conclusion
NPS investment offers a structured approach to planning for retirement with the added advantage of tax benefits. However, like any investment decision, it requires careful consideration of various factors, including your risk appetite, expected returns, liquidity requirements, and the stability of income post-retirement. By keeping these five points in mind, you can make a more informed decision about whether NPS investment is the right vehicle for your retirement savings and how to strategically approach investment in NPS to maximise benefits for your future financial security.