The National Pension Scheme (NPS) was set up in 2004 by the Pension Fund Regulatory and Development Authority of India (PFRDA) and the Government of India. The objective was to ensure a financially secure retirement life for working individuals. It is a retirement cum pension scheme that allows tax savings of up to Rs 1,50,000 a year. It is very inclusive because government and private sector employees can invest. It is one of the country’s oldest and most successful social security initiatives.
It allows people, even from the unorganized sectors, only barring members of the armed forces, to invest. The scheme started to encourage the average working individual to keep putting aside money at regular intervals for future use. An individual could withdraw only a portion of this amount monthly, and the remaining was used to purchase annuities. But now, this has changed; he can remove it all as monthly pensions.
In the starting, it was less pervasive than it is now. It only covered Central Government employees but is now open to all Indian citizens voluntarily. The scheme is portable with changes in jobs across different sectors. It allows tax savings under Section 80C and Section 80CCD.
Who should invest in the NPS?
Anyone who is risk-averse and wants to get decent returns can invest in the NPS. It is a good tool for anyone planning financial stress and mess-free retirement life. With all its features, it is highly recommended for employees retiring in the private sector. Salaried people who want to make the most of the 80C deductions can also consider this scheme.
Features and Benefits of the NPS
Returns: The NPS has proven more effective than traditional savings and investment instruments. It has given a return of 8-10% over the past decade. One significant benefit is that the subscriber is permitted to change the fund manager if they aren’t satisfied with the output of the current fund.
Risks entailed: There existed a limit of 75% to 50% on equity exposure for the National Pension Scheme (NPS). For government employees, this is relax to 50%. In these given limits, the equity portion will reduce by 2.5% each year beginning from the year the investor turns 50.
However, for someone aged 60 years and above, the limit is fix at 50%. This stabilizes the risk-return equation in the best interest of the investors, which means the fund is safe from the equity market volatility. The earning potential of NPS is higher as compared to other fixed-income schemes.
Tax benefits: As mentioned before, there is a deduction of up to Rs.1.5 lakh to be claime for NPS – for the employee’s contribution as well as for the gift of the employer. – 80CCD(1) covers the self-contribution, part of Section 80C.
The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the limit. This limit is 20% of the gross income of the self-employed taxpayer.
Section 80CCD(2) covers the employer’s NPS contribution, which will not form a part of Section 80C. This benefit is not available to self-employed taxpayers.
The maximum amount eligible for deduction will be the lowest of the below:
- Actual NPS contribution by employer
- 10% of Basic + DA
- Gross total income
You can claim additional self-contribution (up to Rs 50,000) under section 80CCD(1B) as an NPS tax benefit. The scheme, therefore, allows a tax deduction of up to Rs 2 lakh.
Pre-maturity and emergency withdrawals: As a pension scheme, one needs to continue investing until 60. However, if one has been investing for at least three years, one may withdraw up to 25% for specific purposes.
These include children’s weddings or higher studies, building/buying a house, or medical treatment of self/family. Withdrawals can be made up to three times (with a gap of five years) in the entire tenure.
Equity Allocation Structure: The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. One can allocate a maximum of 50% of your investment to equities. There are two options to invest in – auto choice or active choice.
The auto choice decides the risk profile of your investments as per your age. For instance, the older you are, the more stable and less risky your investments. The active choice lets you decide on the scheme and split your assets.
Individuals can also use the Bajaj Finance NPS calculator to evaluate the efficacy of their investments. Therefore, the National Pension Scheme is highly lucrative, and one must seriously consider it.