Retirement planning can be confusing and intimidating, with multiple financial products in the market, from both private and public sector entities, all advertising various benefits. Finding the one that suits your requirements, counters inflation, and offers you financial security can seem like a gamble. Some government-backed savings options can provide you with a safety net after your retirement, providing a regular income and comfort in your older years. The National Pension Scheme(NPS) is one such option that can be a great retirement companion. Let’s find out more about how to join NPS and use it to successfully plan for your retirement.
What is NPS Investment?
NPS is a voluntary social security scheme offered by the Central Government to employees from the public, private and unorganised sectors, with the only exception being people from the armed forces. It allows you to make regular contributions towards your retirement during your working years. After the age of 60, you can withdraw a part of the corpus in a lump sum, while the remaining portion is used to purchase an annuity plan for your future financial needs.
Why to Invest in NPS?
NPS is a dependable scheme that can offer you peace of mind and an adequate means of income after your retirement. If you are in two minds about how it can benefit you, here are some things to know:
- Help your money grow:
NPS invests your money in a combination of securities, including equity, corporate debt, government bonds, as well as alternative investment funds. Overall, these help you create wealth without exposing you to too much risk. The NPS schemedraws a good balance between high-risk equity and low-risk bonds. The equity investment is gradually reduced by 2.5% each year, after you turn 50. This allows your money to grow in value and beat inflation without putting you in a high-risk situation.You can use an NPS calculator for more clarity on returns.
- Financial security in retirement:
You can withdraw your money from the NPS account after the age of 60 years. 60% of the total corpus can be withdrawn and used for your immediate needs. This could be to buy or renovate a house, travel, cover medical bills, or cater to any other needs that you might have. The remaining 40% is invested in an annuity of your choice, from a Pension Fund Regulatory and Development Authority (PFRDA)-registered insurance company. This ensures that you receive a regular income for life. The primary goal of the NPS is to replicate your income in retirement. Even though you won’t be working, you will still have a steady income to depend on.
- Control your investments:
The NPS schemeoffers two options to manage your investments – auto and active choice. The auto choice automatically decides your asset allocation as per your age. This option follows the life-cycle based approach (moderate, conservative, and aggressive), which invests in equity when you are young and gradually moves to lower risk options as you age. The active choice lets you pick the asset class allocation on your own. You can decide which way to go based on your preference and goals. You also have the option to change your fund manager if you do not like performance of your current one and find that your investment has not shown sufficient growth.
- Save tax:
NPS is an excellent tax-saving tool. You can avail of a tax deduction of up to ₹1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. You can claim an additional deduction of ₹50,000 under Section 80CCD (1B). Further, if your employer is contributing to your NPS, you can claim another tax deduction of up to 10% of your salary, including the basic pay and dearness allowance or equal to the contributions made by the employer towards the NPS under Section 80CCD (2).
To sum it up
With it government backing, balance between risk and returns and the tax savings it offers, NPS can be the perfect financial tool for retirement planning.Moreover, the minimum investment is only ₹500 for Tier I and ₹250 for Tier II accounts at registration, making it ideal for all income groups. You can use an NPS return calculatorandstart planning a successful retirement today.