Retirement is a great moment in your life. You have all the time to spend with your family and enjoy doing things you love doing most. From there onwards, you just want to live life to the fullest and take each day as it comes. Money, along with time, is key to a happy retired life. You must plan and save well to revel in those enjoyments that retirement offers.
Keeping a plan ready for your financial planning is equally necessary. Investing in a National Pension Scheme for tax benefits during your employment years can be wise and yield good returns for retirement. The National Pension Scheme, or NPS, is a convenient pension scheme for every individual for retirement. What other benefits do you get from NPS? Read on for all the information you would need on NPS to feel compelled to invest in it.
What is NPS?
The popular National Pension Scheme (NPS) is a retirement program provided by the Government of India to ensure a consistent income in retirement and to promote saving habits.
This National Pension Scheme for tax benefits offers two account categories: Tier-I, which is mandatory and restricts withdrawals until retirement, and Tier-II, which allows for greater flexibility in withdrawals. Members get to divide their contributions amongst corporate bonds, government securities, and stocks.
For long-term national pension plans, NPS is a popular choice because it helps with financial planning and retirement security and offers tax benefits under Sections 80C and 80CCD(1B).
Benefits and Features of Investing in NPS
Here are the top reasons to invest in NPS:
● Regulation and Security
The NPS is overseen by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring transparency and security for investors. This regulatory framework instills confidence by governing the activities of the NPS Trust, which manages pension funds.
● Voluntary Participation
NPS operates as a voluntary retirement savings scheme, allowing individuals to open accounts conveniently during the financial year. Participants get the flexibility to determine the amount they wish to invest annually and adjust contributions based on their financial circumstances and retirement goals.
● Portability Across Locations
Another key benefit of NPS is its portability. Upon opening an account, investors receive a PRAN number, which remains unchanged even if they relocate or change jobs. This feature ensures continuity and ease of management, as the account is accessible and manageable from anywhere in India.
● Flexibility in Investment
NPS offers flexibility through two account tiers: Tier I, which restricts withdrawals until retirement age, and Tier II, which allows for withdrawals as and when needed. Investors can choose from various investment options across different asset classes, such as government securities, corporate bonds, and equities. They also have the option to decide the allocation of funds based on their risk tolerance and investment preferences.
● Market-Driven Returns
Investments in NPS are managed by professional pension fund managers who allocate funds according to market conditions and investment objectives. While returns are not guaranteed and vary based on market performance, historical data suggests that NPS has the potential to offer competitive returns compared to traditional tax-saving investments.
How to Invest in NPS?
Step 1: Selecting an NPS Account Provider
Start by choosing a suitable NPS account provider from the list of entities authorised by the PFRDA. These providers include banks, financial institutions, and other intermediaries. Consider factors like customer service, charges, and investment options each provider offers.
Step 2: Opening an NPS Account
- Application Process: Complete the NPS application form provided by your chosen account provider. This form is available online or through physical branches of banks and financial institutions.
- Documents Required: Prepare necessary documents such as identity proof (Aadhaar card, PAN card, passport), address proof (utility bills, rent agreement), and age proof (birth certificate, school leaving certificate).
- Choosing Account Type: Decide between Tier I and Tier II NPS accounts. Tier I is mandatory for long-term savings with withdrawal restrictions, while Tier II offers flexibility for short-term savings with no lock-in period.
Step 3: Contribution and Investment
- Initial Contribution: Make an initial contribution to activate your NPS account. The minimum contribution amount is Rs. 500.
- Regular Contributions: Set up regular contributions to your NPS account either through automatic deductions from your bank account or manual deposits.
Step 4: Fund Allocation
Select your preferred investment option: Active Choice or Auto Choice. Active Choice lets you decide the allocation percentage across equity, corporate bonds, and government securities. Auto Choice adjusts your investments based on your age.
Step 5: Monitoring and Management
Monitor your NPS account regularly through the account statement provided by your NPS account provider. Manage contributions, track fund performance, and make necessary adjustments based on your financial goals and risk appetite.
Who is Eligible to Invest in NPS?
Are you eligible to invest in NPS, check here:
- Citizenship: Both residents and non-resident Indians (NRIs) can open an NPS account, subject to regulatory filings by RBI and FEMA. OCI, PIO cardholders, and HUFs are ineligible.
- Age Criteria: Eligibility ranges from 18 to 70 years at the time of NPS account application submission.
- Risk Profile: NPS offers low-risk investment options, making it suitable for risk-averse individuals concerned about market volatility.
Tax Benefits under the NPS scheme
Below are the various benefits offered by the National Pension Scheme for tax benefits:
Tax Benefit
| Category | Description |
| Under Section 80CCD 1 (B) | Individuals investing in Tier I NPS accounts can claim an additional tax benefit of up to Rs. 50,000 over the Rs. 1,50,000 limit under Section 80C. |
| Under Section 80CCD (2) | Employers contributing to Tier I NPS accounts can claim a tax exemption of 14% (for central government) and 10% (for others) of the salary contributed. |
| On Partial Withdrawal | Withdrawals of up to 25% from NPS accounts are exempt from tax. |
| On Lump Sum Withdrawal (after 60 years) | Withdrawals of up to 40% from NPS accounts after age 60 are exempt from tax. |
| Annuity Purchase | Investments made towards purchasing annuity plans are tax-free, but the annuity income is taxable. |
Conclusion
Investing in the National Pension Scheme for tax benefits can be a wise choice in the long run. With options like Tier I for long-term savings and Tier II for short-term liquidity, NPS caters to diverse financial needs. Its regulated framework ensures transparency and investor protection.
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