Why Should You Choose NPS As A Tax-Saving Investment?

By Medha Roy Chowdhury | February 8, 2019

Are you struggling to save money for your post-retirement days? And also, does the idea of investments leave you troubled? We’ve got a superb solution to your worries. Read on to know more about it.

Have you just stepped into the shoes of an employed professional? With retirement not around the corner, it is quite easy to put off retirement planning till late. But, unfortunately, this might not be too wise a thing to do. Surprised? Well, the sooner you start, the stronger your retirement corpus will be. Also, it’s important to realize the below three things.

Firstly, you obviously don’t want to work forever. Secondly, everyday responsibilities can hold you back from ticking off things from your bucket list. You can finally visit all the places you want to, and experience everything you’ve always dreamt of after retirement. Thirdly, the future may hold more challenges than your present.

These are reasons enough for you to get cracking on that investment fund you’ve been ignoring for a while now.

Additional Reading: A Millennial’s Guide To Tax-Saving Investments

Say hello to the National Pension Scheme (NPS)

Offered by the Government of India, NPS is a sound investment avenue for anyone from 18 to 60 years of age who is looking forward to investing his/her money safely, besides getting reliable and handsome returns.

NPS is an easily accessible and portable retirement savings instrument that is low cost and tax efficient.

Offering a large variety of investment options, NPS helps individuals decide where to invest their money wisely. It aims at ensuring that citizens earn a stable income even after their retirement, coupled with decent returns on their investment.

Additional Reading: Is Investing In NPS Worth It?

How does NPS work?

  • After getting enrolled, a Permanent Retirement Account Number (PRAN), which remains unchanged throughout the length of the scheme, is allotted to the policy holder.
  • After the generation of PRAN, an SMS and email alert is sent by the National Securities Depository Limited as the Central Record-Keeping Agency (NSDL-CRA) to the registered mobile number and email ID of the holder.
  • To establish the retirement corpus, the policy holder must make regular monetary contributions to the NPS account till retirement.
  • The holder of the account will receive the corpus after exiting from the scheme or post retirement. To receive a monthly pension during the retirement years upon exiting the scheme, a section of the sum has to be invested in an annuity.

Additional Reading: How A Subscriber Can Register NPS Grievances

Benefits of NPS:

  • An individual can open the pension account under NPS at a low cost and the holder can decide how much he/she is willing to contribute each month.
  • As per the 1961 Income Tax Act, NPS offers tax benefits of up to Rs. 1.5 lakhs.
  • Investments made under NPS are well-managed by experienced and highly qualified pension fund managers (PFMs).
  • NPS is an entirely voluntary scheme and is open to every Indian citizen. Account holders have the discretion to choose where to invest.
  • The application process is fairly simple. In addition, NPS is a long-term retirement savings scheme. Upon reaching retirement, the holder can withdraw 60% of the retirement corpus, while the remaining amount is converted into a monthly pension.

Additional Reading: Opening An NPS Account Online

Here are some facts related to NPS

  • An NRI can open an NPS account too.
  • Anyone who has invested in private pension schemes is also eligible to open an NPS account.
  • The documents that have to be submitted while opening an NPS account include the duly filled-in registration form, an identity proof, an address proof, and an age or date of birth proof.
  • You can operate your NPS account from anywhere in the country.
  • An individual is allowed to hold only one NPS account.
  • The minimum contribution to an NPS account is Rs. 500 for a Tier I account holder and Rs. 250 for a holder of a Tier II NPS account. No maximum contribution limit exists for an NPS account.
  • Account holders can withdraw the entire sum without purchasing an annuity only if the total retirement corpus is less than or equal to Rs. 2 lakhs.
  • In the event that the account holder makes a premature exit, 80% of the retirement corpus must be used in purchasing annuity, while the remaining 20% is paid as a lump sum.
  • In the event of the early demise of the NPS holder, the entire corpus is paid to his/her nominee or legal heir.

What are the income tax benefits available to individuals contributing to NPS?

  • Tax-benefit for the salaried professionals:

Employed individuals enjoy tax benefits both on their employer’s contribution as well as on their own contributions.

  • Under Section 80 CCD (1), an employee’s personal contribution makes him/her eligible for tax deduction up to 10% of the salary within the limit of Rs. 1 lakh.

(b) Under Section 80 CCD (2), the employer’s contribution makes an employee contributing to NPS eligible for tax deduction up to 10% of the salary, over and above the limit of Rs. 1 lakhs.

  • Tax benefit for the self-employed:

Self-employed individuals contributing to NPS are eligible for tax deduction up to 10 % of their gross income, with an overall limit of Rs. 1 lakh under Section 80 CCE.

Contributing to an NPS account will help you set aside a certain sum of money each month. In the long run, this will help you turn into a disciplined investor. The longer you stay invested, greater will be the compounded benefits. In addition, having an NPS account in place offers amazing flexibility. So, you can invest a small sum every month without disrupting your monthly budget.

Additional Reading: How To Activate Your Frozen NPS Account

If you still wish to maintain your financial independence and ensure a comfortable standard of living post retirement, it’s best to start early. And what can be better than a tax-saving investment scheme with amazing post-retirement benefits!

Additional Reading: 5 Tax-Saving Investment Options That You’ll Love

If you’re on the lookout for more such financial products to help you achieve financial nirvana, we’re right here to help.

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Category: NPS UCN
Medha Roy Chowdhury

About Medha Roy Chowdhury

Square peg in a round hole, Medha reads whenever she gets the chance to. She is happiest when travelling and dreads having to choose between the hills and the sea. Dog lover at heart, she is in pursuit of adopting a few canine friends someday. Weird as it may be, she bakes when stressed. Previously a Market Research Editor by profession, she takes a keen interest in finance. When she is not reading, you’re sure to find her with her ukulele.

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