Creating a substantial retirement corpus is a crucial aspect of financial planning. This is to ensure that you have adequate funds to meet your various expenses during your retirement. With this in focus, the Indian government launched the National Pension Scheme (NPS) to provide investors with an opportunity to take care of their life, post their retirement.
What is NPS?
The National Pension System (NPS) is a government-backed pension scheme. It was first launched in 2004 solely for government employees. However, the scheme opened up to every investor in the country in 2009. The goal of NPS is to provide financial security to investors in their old age.
How does NPS work?
Under the NPS investment scheme, you can make investments towards your pension account on a regular basis during your working life. And when you reach your retirement age, you can withdraw a portion of the fund as a lump sum. The remaining portion is used to purchase an annuity so you can benefit from a regular income during your retirement years.
You can join the NPS scheme voluntarily, or you can opt for the plan offered by your employer. If your company provides NPS, it matches your investment and makes an equal contribution to the fund. Professional fund managers regulated by the Pension Fund Regulatory and Development Authority (PFRDA) invest your funds in different portfolios. This includes government bonds, shares and corporate debentures.
Who can invest in NPS?
All Indian citizens between the ages of 18 to 60 are eligible to make investments in NPS. So, irrespective of whether you are a government employee, private employee or self-employed, you can invest in NPS. This includes Non-Resident Indians (NRIs) as well. The only condition for joining the scheme is that you must fulfil all the necessary Know Your Customer (KYC) requirements to be eligible. When you open your NPS account, you are provided with a unique 12-digit number known as the Permanent Retirement Account Number (PRAN).
Pros and cons of investing in NPS
Like all the other investment avenues, the NPS too has its pros and cons. These are:
Pros
- The NPS is a voluntary scheme open for all Indians adults to invest
- It is highly flexible because you have the freedom to choose your asset allocation between equity and debt based on your investment requirements
- You can invest as much as you want each year. There is no limit on the maximum investment limit
- You can operate your account from anywhere in the country
- The 60% corpus that you withdraw on retirement is tax-free
Cons
- No guarantee on the rate of return
- While there is no maximum limit, you need to make a minimum yearly contribution of Rs. 6,000 to ensure that your account is active
What are the investment choices available in NPS?
The NPS offers two choices:
- Active Choice: You can decide how the money should be invested in different assets. This includes a combination of stocks, fixed income instruments and government securities.
- Auto choice: This is the default option where your money is automatically invested in different avenues based on your age.
| Age | Equities | Corporate bonds | Government securities |
| Less than 35 years | 50% | 30% | 20% |
| 40 years | 40% | 25% | 35% |
| 50 years | 20% | 15% | 65% |
| More than 55 years | 10% | 10% | 80% |
Tax benefits
Every investor can claim a tax deduction of up to 10% of gross income under Section 80CCD (1) of the Income Tax Act. This is within the overall ceiling of Rs. 1.5 lakh permitted under Section 80C and Section 80CCE. In addition, the contribution made by your employer is exempted under Section 80CCD (2). You can also claim an additional deduction of Rs. 50,000 under Section 80CCD (1B).
Conclusion
If you’re planning your retirement, you can consider investing in NPS as an option for your golden years. But do ensure that you have a healthy mix of equity and debt in your other investments to help you build wealth.