Investment planning is not alien to Indians. When it comes to thriftiness and future planning, no one can beat Indians. Also, saving for a rainy day is imbibed in Indian culture for centuries. There is even a famous adage in one of the regional languages that goes like – “Spend What Is Left After Saving”. That is how money conscious our fellow Indians are.
Retirement savings is an important portfolio in every Indian household. Government servants used to heavily rely on their PPF savings and Government pension until a decade ago. Private sector employees have highly relied on private pension plans to plan their retirement.
In the year 2004, the government introduced the NPS, National Pension Scheme as a replacement to the traditional pension system for government employees. This scheme was later thrown open for public investment.
What is NPS? How does it work?
Under NPS, an individual can make systematic investments throughout the year. These funds are then invested in pension funds and managed by pension fund managers to get you optimum returns. The funds can be accumulated till the individual turns 60. The funds keep gaining based on market performance. The accumulated amount is then invested in an annuity plan, at the time of retirement, to provide for regular pension for the investor.
This is a simple plan that allows for systematic savings for your retirement planning.
Additional Reading: Atal Pension Yojana
Here are the top 6 reasons why NPS is a good investment option
Government backed plan – This is one of the primary reasons for choosing NPS. NPS is governed by the PFRDA (Pension Fund Regulatory and Development Authority). The funds are managed by professional fund managers, under certain guidelines set by PFRDA. There are also different fund options available for the investor to choose from and they can make use of yearly switches to earn the best returns for their investment. However, investors should note that the investments are market linked and hence they should carefully choose a fund to suit their risk appetite.
Get assured pension for life – NPS assures pension as soon as you turn 60. Bigger the corpus you have accumulated, bigger is going to be your pension amount. With entry age as less as 18 years, the scheme allows you to start planning from a very young age towards a comfortable retirement period. The accumulated fund can be partially withdrawn once you turn 60 and the rest is invested in an annuity plan that will provide you with a regular pension. Upon the death of the investor, the beneficiary can choose to continue the pension plan, or withdraw the amount from the annuity and close the account.
Flexible investments – NPS allows for systematic investments. It allows you to invest at any time of the year, either in lump sum or in small amounts, to suit your monthly cash flow. The minimum investment is just Rs.1000 per annum with no upper limit. This allows you to manage your investment conveniently to achieve the desired pension amount. Even self-employed individuals, who don’t have a steady income, can take advantage of this scheme and invest as when they come across surplus money.
NPS invests in diverse assets, such as equity, corporate debentures, government bonds, etc. Subscribers have the option of equity and other funds to select from. As per their risk appetite, they may choose either an Aggressive Life Cycle or a Conservative Life Cycle. There is also an automatic option in which the fund invests in an age-adjusted combination of equity and debt.
Tax Savings over and above your 80C limit – The most important benefit of NPS is the additional Rs. 50,000 tax rebate you get, over and above the Rs.1.5 lakhs under Section 80C. NPS allows individuals to claim deduction for the investments in their Tier I account, for an additional Rs. 50,000 under Section 80CCD (1B). This results in an additional tax savings of Rs. 15,600 every year.
With respect to the withdrawals, there is no tax for 40% lump sum withdrawal & 60% annuity purchase model. The plan requires you to invest a minimum of 40% in annuity. So, if you choose a lump sum withdrawal above 40%, that portion alone will be taxable.
Simple account management – NPS has a very comprehensive online portal that allows individuals to create and manage their NPS account completely online. eNPS is a user friendly portal that gives various features that enable you to perform all the functions relating to your NPS account from the comfort of your home.
Even the banks and NBFCs that offer NPS accounts give online access for hassle free NPS account management. Upon opening an NPS account online, you are allotted a PRAN number that will serve as an identification number for your pension account. A Tier I account is the basic account where your funds are invested. One can also choose to open a Tier II account if they want to actively manage their funds on their own. The online portal lists various services like online contribution, holding statement, transaction history, profile section, grievance section, a self-help section and many more.
Portable – As stated above, upon opening your NPS account, you are given a PRAN number that serves as a unique identification number for your pension account. With this PRAN number, you can use your pension account across different jobs, different cities and locations across the country. Just like your EPF account number, you can quote this PRAN number in your new job so that the pension amount is credited to the same amount. This allows for seamless account management of the corpus that the investor has built over time.
NPS is a simple and systematic savings plan for any individual, either salaried or self-employed. It is completely voluntary. Owing to its fixed benefit structure, it intends to allow subscribers to make an informed decision towards a favourable future by systematic savings during their working years.
NPS enables individuals to save systemically for a stress free retirement period. It also inculcates the habit of savings in the middle income group and thus solving the issue of providing every citizen of India with a sufficient retirement income.