In India, finding a steady source of income after retirement is a common worry for people, irrespective of age. The National Pension Scheme (NPS), made available to all citizens from 2009 onwards, attempts to solve this issue effectively.
Under the NPS, employees make a monthly contribution of 10 per cent of their salary, and a matching contribution is made by the employer as well. Any Indian citizen between the ages of 18 and 60 working for a corporate entity is eligible for the scheme, if enrolled by the employer.
The Financial Express states that NPS is among “the best investment tools of retirement planning in India”, and that it is best to start young.
Financial planner Nishant Batra explains the NPS in eight key points, emphasising that the younger generation must take note of the provisions the scheme has to offer.
1. Tax saving
According to Nishant, tax saving must be the first and foremost reason for investing in NPS. “If you are doing it for any other purpose, you are doing it wrong,” he wrote.
First and foremost, sole reason for investing in National Pension Scheme:
💡tax saving and there by a place in retirement portfolio.
If you are investing in NPS for any other purpose, you are doing it wrong.— Nishant Batra CWM® 🇮🇳 (@stepbystep888) August 15, 2022
2. Pick Tier 1 account
There are two types of NPS accounts – Tier 1 and Tier 2. The former is “where all tax deductions are applicable,” says Nishant, adding that Tier 2, on the other hand, is nowhere as beneficial. He also pointed out that under Tier 2, users do not get tax benefits, credit card rewards, etc.
3. Tax saving in three sections
There are three sections to tax saving – 80CCD(1), 80CCD(1B), and 80CCD(2).
80CCD(1) has a limit of Rs 1.5 lakh. Nishant says this section is “useful only for Central government employees”.
The 80CCD(1B) section provides an additional deduction of Rs 50,000 over and above the 80C section limit of Rs 1.5 lakh. All Indian citizens and Non Resident Indians (NRI) can claim deduction under this section, explains Nishant.
Under section 80CCD(2), employees can invest through their employer up to 10 per cent of their basic salary, plus dearness allowance. “This amount will be tax deductible and there is a cap of Rs 7.5 lakh, which includes contribution from employer towards EPF, NPS and any other superannuation fund,” wrote Nishant.
4. Two options to choose from
The two choices are active and auto choice. This way, users have an option to choose asset allocation of investments within four asset classes – equity, corporate bond, government sec and alternate investment fund.
Under the active choice, one can choose the asset allocation subject to the following capping:
- Equity should be less than or equal to 75 per cent
- Asset allocation should be less than or equal to 5 per cent.
The maximum permitted equity allocation upto the age of 50 years is 75 per cent. Later, it goes down by 2.5 per cent every year till it reaches 50 per cent when one turns 60 years old.
“Always choose active, with maximum equity and remaining in corporate bonds or Government bonds,” advises Nishant. He also says to ignore the alternate investments.
5. EEE status
The scheme has Exempt-Exempt-Exempt (EEE) status. This means one gets tax exemption for the invested amount, for the growth of capital, and for the maturity proceeds. But 40 per cent of the maturity proceeds need to be invested in a pension bearing annuity, says Nishant.
6. Withdraw at the age of 75
The money from NPS can be withdrawn at the age of 60 or superannuation period, which is between 58 and 60. Nishant lists three withdrawal options.
Nishant however is of the opinion to let it grow till 75, because it is always good to have an investment.
7. NPS for everyone
NPS is suitable for all employees and employers in the country. For those in their 50s and not under the scheme, if your accumulated corpus is less than or equal to Rs 5 lakh, withdraw 100 per cent lump sum and contribute to NPS, Nishant advises.
8. Who shouldn’t?
Nishant advises that immediate focus should be on insurance, and creating enough liquidity for your siblings’ education, own marriage, health care fund for family, and a decent emergency fund. Once there’s another person in the family who earns, start NPS.
Edited by Divya Sethu