National Pension Scheme (NPS) is a retirement savings scheme launched by the Government of India, aimed at providing financial security to citizens when they do not actively earn exceptional tax benefits during the investment period post retirement. We do. When it was first launched in January 2004, it was open only to government employees. However, in 2009, the scheme was expanded to include all citizens of India, including non-resident Indians. Today, any Indian citizen, residing in any part of India or rest of the world and his age between 18 and 70 years of age, can invest in this scheme.
NPS is regulated by the Pension Fund Regulatory Development Authority (PFRDA), which gives investors peace of mind and transparency. It is quite simple to invest in this scheme either through small regular payments or through a lump sum amount. However, there is a condition that the lock-in period lasts for 5 years of investment or the retirement age, whichever is earlier. Premature withdrawal from the scheme is allowed only in exceptional circumstances.
Through NPS, investors can choose to invest their money in 4 types of assets – equities, corporate bonds, government bonds and alternative assets, such as Real Estate Investment Funds (REITs). Therefore, the returns will depend on the market performance of the chosen asset class. Those who are not experienced in the financial markets can choose to invest in a pre-determined asset allocation that is determined based on the age of the client.
The National Pension Scheme offers several benefits over other fixed income plans. Let’s take a look at this.
lowest cost pension plan
NPS is considered to be the lowest cost pension scheme in the world. It requires a minimum investment of Rs 1000 per year for a Tier 1 account. We spend more on a movie or dinner in a good restaurant than this amount in the theater. Also, the administrative fees and fees for fund management are also the lowest. The best part is that with small investments like these, you can make the most of the power of compounding to build a huge corpus by the time you reach retirement age. At this point in time, you will start receiving monthly annuity (annuity) payments based on the accumulated amount.
income tax benefits
National Pension Scheme provides tax benefits on the amount you invest each year. Under Section 80CCD 1(b) of the Indian Income Tax Act 1961, you can claim additional tax deduction on your taxable income for a financial year over and above 80C investments.
Under Section 80CCD(1): Here, you can claim a maximum deduction of up to 10% of your annual salary. For self-employed investors, this limit goes up to 20% of their gross income.
Under Section 80CCD(2): It covers the contribution of employers towards the amount invested in NPS on behalf of the employees. Maximum amount tax exemption is the least of the following-
Actual NPS contribution by the employer
100% Basic + Dearness Allowance
gross total income
Tax benefits are also available to employers who contribute to NPS on behalf of their employees. Such contribution can be shown as business expense by the employer, and the employee can claim additional tax benefits under section 80CCD(2)-
All customers can claim any additional self-contribution up to Rs.50,000 under section 80CCD(1B), which is above the 2 sections mentioned above.
Flexibility and Convenience
NPS offers several levels of flexibility. The first option is to invest in lump sum or make periodic payments. Secondly, you are free to choose the amount you wish to invest and the interval at which you will contribute to the scheme, such as monthly or yearly, etc.
Another level of flexibility comes from the freedom to choose whether you will actively manage your own asset allocation through Active Choice, or invest based on your age in pre-defined portfolios via Auto Choice . If you are confident about your knowledge and experience of the financial markets, you can choose to split your investments among the four asset classes according to your risk appetite. Even under Auto Choice, you get to choose from ultra-safe, conservative, balanced and aggressive asset allocation based on your risk appetite.
Another major advantage of this pension plan is easy online access, which allows you to monitor your investments and make smarter decisions regarding asset allocation. But remember that the returns depend on the performance of the asset.