How to retire comfortably by investing in National Pension System (NPS) How NPS helps to save tax and give a worry-free retired life Retirement Planning by Investing in NPS: All that you want to know
National Pension System (NPS) has emerged as a popular investment vehicle for those looking to save for retirement. If you are looking to accumulate a sizeable corpus by the time you retire, NPS is the scheme to consider. By investing in NPS, you will be able to create a corpus and also get a lifetime pension. Simply put, a lump sum amount on maturity ( on retirement), tax savings, and a regular pension till a lifetime – this is what NPS offers to subscribers.
NPS, essentially, is a market-linked investment and works as a deferred pension plan. In simple terms, a deferred pension plan means – you pay regularly for a specific period and then start getting a pension on the accumulated corpus. NPS thus is a defined contribution plan, i.e. the amount you save will determine the amount of pension you will get after retiring. NPS stands out above other investment options due to its low cost, simplicity of access, and ability to grow a corpus using market-linked asset classes.
Let us see how NPS works – One receives a PRAN (Permanent Retirement Account Number) after opening an NPS account, and contributions must be made up to age 60. At age 60, payments cease, and a person may withdraw up to 60% of the corpus before beginning to receive an annuity or pension from one of the approved annuity providers on the remaining 40% of the NPS corpus. The designated annuity providers are the life insurance firms, and you can request a pension from any of them. Being an investment geared toward retirement, there is a provision to get a required pension.
Now, let us see where you can invest your money and which fund options are available to subscribers. But, before that, know the two options to manage funds in NPS – Active choice and Auto Choice.
There are three fund options under the Active selection: E, C, and G. A maximum of 75% of the portfolio in (E) is allocated to stocks; in (C) it is largely allocated to fixed-income securities other than government securities; and in (G), it is primarily allocated to government securities.
If one is uncomfortable making a choice, there is the Auto option, which invests money automatically and starts with a maximum equity exposure of 75% till the age of 35 before tapering off to 10% by the age of 55.
So, now that you have seen the working of NPS and the various fund options available in the scheme, let us know the different tax benefits that subscribers are allowed to avail while saving through NPS.
After exhausting the maximum of Rs. 1.5 lakh under section 80C, the majority of taxpayers can consider NPS as a way to save for retirement and reduce their tax burden.
There are various sections of the Income Tax Act, 1961, where the tax benefit for NPS is available. A deduction of up to 10% (20% for self-employed individuals) of the employee’s basic salary may be availed for NPS contributions under section 80CCD (1) if the employee works for a company other than the government.
Additionally, an employee may deduct additional income up to Rs. 50,000 under section 80CCD (1B) by making contributions to NPS. From the financial year, 2015–16 onward, this additional deduction of up to Rs 50,000 is made possible in NPS. It represents an additional savings of around Rs 15,000 per year for someone in the highest tax bracket who pays a tax rate of 30 percent.
In addition, up to a maximum of 10% of pay, an employee is also eligible for a deduction under Section 80CCD(2) for the employer’s contribution to his NPS account.
The tax benefits, as above, are at the contributory stage when you keep investing regularly in NPS. But, what about the taxation on the NPS corpus and on the pension? As per the current tax laws, the NPS has exempt-exempt tax i.e. EET structure. On maturity, 60 percent is available to withdraw and is fully tax-exempt but the annuity is taxable under the present tax laws.
Finally, here’s what you are looking for – How much pension can I get while investing in NPS?
Illustratively, if a 30-year-old contributes Rs 15,000 a month in NPS, the corpus at age 60 grows to Rs 5.30 crore at an assumed annualized return of 12%. If the NPS subscriber chooses to get an annuity on the entire corpus, then at an assumed rate of 6% per annum, the monthly pension amount comes to about Rs 1 lakh.
Every individual’s needs are different and we are here to help you out carve out a specific investment plan based on your goals, needs and aspirations. To know how much you need to save click here