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NPS- The solution to your retirement problems?

What is going to be the source of your income after your retirement? With all the medical bills, expensive education for your children you will have to continue to work even after your retirement. Well, that certainly isn’t what you’d imagine a happy retirement to look like.

To help you build your retirement corpus, the Indian government has introduced the NPS (National Pension Scheme) to help you save for your old age.

What is NPS (National Pension Scheme)?

  • NPS (National Pension Scheme) is an Indian Government-introduced scheme that has come to surface as one of the beneficial and supportive schemes for retirement savings.
  • It is a voluntary retirement scheme through which all Indian citizens (resident or non-resident) can create a retirement corpus and an old-age pension between ages 18 and 65 years.

Who should invest in NPS?

The NPS is a beneficial scheme for those who want to plan for their retirement and don’t have a high-risk appetite. Business owners, salaried people who retire from private-sector jobs, and those who want to make the most of the 80C deductions can also invest in this scheme.

Features of NPS

The NPS provides the citizens with various benefits that make it a great way to save for their retirement.

01. Disciplined Investment-

This means that it is tough to get out of this scheme as the account is rigid and will not let you get your investments out until you have reached the age of 60.

However, in certain conditions like cases when the subscriber has a critical illness or needs money for children’s education, wedding expenses, buying or constructing a house, a partial withdrawal is allowed.

02. Tax Benefits-

The NPS grants tax benefits at the time of investing, on the gains, it makes during the tenure of the account and also at the time of withdrawal on maturity (age 60). This is known as EEE Tax Benefit (Exempt exempt exempt status) which is exempt on contribution, exempt on gain and exempt on maturity.

  • You can claim a deduction of up to 2 Lakhs – Individual taxpayers can demand a deduction on investments under NPS for up to Rs 1.5 lakh under Section 80C in a financial year. Upon that, NPS subscribers of Tier I can claim an additional deduction for investment of up to Rs 50,000 under Section 80CCD (1B) in a financial year over the initial investment deduction of Rs 1.5 lakh under Section 80C.
  • However, you can only withdraw 60% of the total retirement corpus before the age of 60. The rest of the 40% is invested in buying an annuity which will be given on an annuity after the age of maturity/retirement.

03. Government Regulation-

All characters and features of the NPS are regulated and monitored by the PFRDA (Pension Fund Regulatory and Development Authority). The PFRDA has sanctioned fund managers and authorised annuity services providers to handle and control the investments. The firm regulations guarantee and secure professional management of investments as well as benefits.

Investment Choices-

The investor has 2 ways to invest in the NPS. But before that, it is important to understand the 4 classes in which investments can be made.

Class E (Equity)- Schemes that invest in equity Market Operations

Class C (Corporate debt)- Schemes that invest bonds issued by Public Financial Institutions (PFIs), Public Sector Undertakings (PSUs), Money Market Instruments and Infrastructure Companies.

Class G (Government Bonds)- Invests in Government securities.

Class A (Alternative Investment Funds)- Investments are made in instruments like CMBS, REITS, AIFs, etc.

Coming back to the two kinds of modes you can invest in:

Auto Choice- In auto choice, the investments are done in a life-cycle fund with three life cycle funds (LC) to choose from.

The asset allocation is automatically set between government securities, corporate bonds and equity as per your age. This means that the risk of investments decreases as your age increases.

There is also a choice to switch between the given two choices for free two times in a financial year. However, the maximum equity allocation is only 75%. It means that if you have opted for LC 75 then after you turn 50, 2.5% allocation from equity would decrease every year. Hence, at the age of 60 years, the equity allocation would reduce from 75% to 50%. Class A is not available under auto mode.

Active Choice – In the case of active choice, you can pick your own asset allocation across equity, government securities, corporate bonds and alternate investment funds. However, the maximum permitted equity exposure is 75%. Also, a 5% allocation can be made into class A. In Active Choice, there is also no auto deduction from equity after the age of 50.

Types of NPS – NPS is categorised into two tiers.

Tier I:

  • This Tier centres on retirement as the investments will be locked till the age of 60.
  • Partial withdrawal is allowed only after 3 years in which a Maximum amount of only 25% can with withdrawn.
  • This category is Tax exempted. The minimum amount of initial investment is Rs 500 and the minimum amount for annual investment is Rs 1,000 without any upper limit.

Tier II:

  • You can move to Tier II only after first having subscribed to Tier I type.
  • There is no lock-in investment in this category. Consequently, the amount can be taken out at any point in time and you don’t have to wait until the age of 60 to withdraw any amount.
  • The tax exemption is up to 1.5 lakh under 80C but it does not grant the additional tax saving of Rs 50,000 under 80CCD which is granted by Tier I.
  • The returns from the tier II category are taxed.

Handing your finances can always be a burden. We strive to guide you with financial literacy to help you make good and safe financial decisions.

Manoj Amarwal,

Saarthi Dream

(Saarthi for your financial dreams )