Many of you may have heard about the National Pension System (NPS), which is a retirement-focused product that is regulated by the PFRDA (Pension Fund Regulatory Development Authority).
What most people don’t know about the NPS is that it is a contribution-based pension system wherein the contribution is fixed while the benefit isn’t entirely fixed. However, since the NPS has some tax benefits, it is seen as a fairly desirable product to most Indians. NPS is the cheapest market-linked retirement plan among other retirement plans like EPF, PPF, and Mutual Funds.
So, should you really invest in NPS? Let’s take a look at NPS post the recent Budget announcement and determine whether or not investing in NPS would suit you.
Additional Reading: Why Investing In NPS Is A Good Idea
Tax Exemption On Early Withdrawals
The 2017 budget did bring in some good news for NPS subscribers after all. Earlier this month our Finance Minister proposed to amend Section 10 so as to provide an exemption on partial withdrawal not exceeding 25% of the contribution made by an employee under the PFRDA Act, 2013.
This means you can now withdraw up to 25% of your contribution to the corpus in case of emergencies before your retirement. For example, if your corpus now is Rs. 4,00,000, of which your contribution has been Rs. 2,00,000, then you can withdraw Rs. 50,000 without any tax incidence before your retirement. The remaining Rs. 3,50,000 can be withdrawn upon retirement.
Since 40% of this Rs. 3,50,000 is tax-free at retirement ie. Rs. 1,40,000 is tax-free, your total tax-free amount will go up to Rs. 1,90,000 (which is Rs. 50,000 + Rs. 1,40,000). So, if you were to withdraw the entire amount at retirement your total tax-free amount would have been Rs. 1,60,000 only.
Do note that this benefit has been made available only to salaried people. However, there’s some encouraging news for the self-employed as well.
Additional Reading: Explore NPS For Good Returns On Retirement
Benefits For The Self-Employed
Self-employed individuals, such as professionals like doctors or advocates, or even fitness trainers or beauticians, are in for some good news. If you are self-employed, you can now invest up to 20% of your gross total income in the National Pension Scheme.
Finance Minister Arun Jaitley proposed to amend Section 80 CCD to increase the upper limit of 10% of gross total income to 20% in case of self-employed individuals. Earlier, salaried people were allowed to contribute 10% of their income to NPS, and their employer’s contribution would be another 10%. However, the self-employed people were only allowed a limit of 10%.
Now, if you are self-employed, you are eligible for deduction up to 20% of your gross total income towards NPS contribution.
Additional Reading: Tax Filing For Self-Employed Professionals
Other Key Points
NPS gives subscribers the benefit of EET (Exempt-Exempt-Tax) where the subscriber has to compulsorily make an annuity with at least 40% of the corpus amount at the age of 60, which will be later disbursed as a pension.
In this case, the corpus will be the total contribution including returns earned from the investment under the scheme. However, 40% of this amount will be tax-free at the time of maturity. But income generated from the annuity will be taxed as per the individual’s tax-slab rate.
You can now get tax deductions up to Rs. 2, 00,000 under Section 80C and 80 CCD with an additional contribution of Rs. 50,000. This is over and above the limit of Section 80C which is Rs. 1, 50,000.
Additional Reading: All You Need To Know About Investing In NPS
Who Should Invest In NPS?
Although the National Pension Scheme is mainly aimed at providing benefits to individuals after their retirement, it also suits those who want to save for retirement but aren’t too sure about selecting the right schemes and investment options. So, if you don’t want to actively manage your retirement portfolio of debt and equity, NPS will be a great option for you.
Additional Reading: Opening An NPS Account Online
How Long Is Too Long?
NPS is a long-term investment which helps you accumulate wealth for your retirement and can be paid out as an annuity after you complete 60 years of age. Since this is a long-term retirement investment, its lock-in period is also quite long.
NPS can be withdrawn only at the age of 60, so if you start investing in NPS at the age of 25-30, the lock-in period is 30-35 years. Despite that, you will be allowed to withdraw only 60% of the total corpus, while the remaining 40% will have to be put into an annuity for a life-long pension.
Additional Reading: Pay-out Options For Retirement Savings
And, What About Annuity Returns?
Annuity rates are not guaranteed. You will get the rate prevailing at the time of your annuity purchase. But first, let us inform you that annuity plans are not sold by NPS. They are sold by insurance companies or annuity service providers empanelled with NPS. In most cases, the annuity yields only about 5% to 7%, which is much lower than what most bank deposits offer.
If you aren’t too keen on investing in NPS and would prefer a bank deposit, you may want to quickly check out our Fixed Deposit rates.