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The National Pension System (NPS) is a voluntary pension system in India. Its objective is to make your retired life comfortable by offering you a regular income. NPS encourages subscribers to get into the habit of saving for life post-retirement. The pension funds registered under NPS are regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
The National Pension System is also a tax exempt-exempt-exempt (EEE) instrument like Employee Provident Fund (EPF) and Public Provident Fund (PPF). Many professionals, including employees of the private and government sectors, are attracted to the NPS tax-saving scheme. It is because the entire amount in your pension fund is exempt from tax on maturity, and you are not liable to pay any taxes on the whole pension withdrawal amount.
Benefits of Investing in NPS
- Flexible
NPS is a flexible retirement savings scheme. Subscribers have a range of investment options and pension funds to choose from. They can plan the growth of the investments reasonably and track the growth of the pension corpus. Moreover, subscribers can switch between different fund managers and investment options conveniently.
- Well Regulated
The PFRDA regulates the NPS. The investment norms are transparent. Moreover, the NPS Trust monitors and reviews the performance of fund managers regularly. NPS does not have high account maintenance costs. In fact, it is the lowest among similar pension products available to investors.
When you are saving for long-term returns, administrative and account management costs play a vital role. If they are high, they can eat up a significant amount from the corpus during the 30 to 40 years investment period.
- Death Benefit
One of the benefits of NPS investment is that it takes care of your family even after your demise. Your spouse or children may live for a good number of years after you are no more. To help you meet your financial obligations after death, NPS allows you to choose a pension plan that continues to pay a monthly pension to your spouse. Your nominee/legal heir can also withdraw the corpus from your pension account.
- Automated Risk Reduction with Age
NPS has a built-in risk reduction strategy. So, it protects your retirement corpus from market volatility as your retirement date is nearing. The funds in your NPS account are exposed to debt and equity investments. When you opt for the auto asset allocation model, you determine a starting equity-debt mix as per your risk appetite. After you cross 35 years of age, your exposure to market-linked products is reduced with more allocation toward FD-like instruments.
- Portable
When you change your job or relocate to a new city, you can port your NPS. It is a hassle-free arrangement for individual subscribers. So, there is no need for you to leave behind the corpus you build.
- Tax Benefit
The tax benefit on NPS is one of the key reasons for its popularity. The scheme allows you to claim deductions worth ₹1.5 lakh under Section 80C. Moreover, if you’ve exhausted the limit in Section 80C with other investments, such as ULIP, you can still claim deductions on your NPS investment. Section 80CCD (1B) lets you claim a deduction of ₹50,000. Thus, the National Pension Scheme tax benefit is ₹2 lakhs cumulatively. The pension income, partial withdrawals, and maturity withdrawals are also tax-free.
However, it is vital to know that there are no NPS tier 2 tax benefits. Your withdrawals from this account are taxable as per the income tax slab rate you fall under.
- Ease of access
Applying to the NPS scheme for tax benefits is easy. You can either submit an online application form or visit any registered POP (Point of Presence) to obtain the registration form. KFintech has tie-ups with hundreds of POPs and thousands of corporates in India, making the account opening process smoother. You can also make further contributions and manage the account online.
Summing Up
If you want to live a stress-free, happy life after retirement, an investment in NPS is a great idea. You can build a retirement corpus and claim tax benefits for NPS under 80CCD. Features like flexibility, portability, ease of use and access, built-in risk reduction strategy, and several tax benefits make it an attractive retirement saving tool.
