5 Reasons Why You Must Invest In NPS For A Peaceful Retirement

Updated: Tuesday, January 19, 2021, 15:30 [IST]

One of the largest challenges of private-sector employees, unlike government employees who receive pensions after retirement, is to maintain a means of monthly income if their salary income ceases. So, if you're an employee of a corporation or company, it's very essential that you consider your retirement planning asap. You can comfortably accomplish your target with lower investments if you plan early since what makes investment returns work better is patience. The interest rate is yet another factor in pension management. The interest rate on fixed deposits (FDs) has already fallen too close to 5-6 per cent with the drastic rate cuts by the Reserve Bank of India (RBI).

So, at the time of retirement, the rate of interest applicable is unsure. The key phase in retirement planning is to measure the amount of pension necessary immediately after retirement to be preserved. The key factors influencing the requirement for a pension are inflation and duration of employment prior to retirement. That being said, if you start saving early and investing in the right way, creating an adequate retirement corpus is not an insurmountable job. And the National Pension System (NPS) is a very strong instrument from which you can accumulate or build a savings corpus for your retirement. But what makes it the only consideration here, let's find out.

Reason 1: Guaranteed pension benefit

You confirm that you continue to earn a monthly income in the nature of a pension for your entire retirement when you invest in NPS. NPS matures when you reach 60, and 60 per cent of the corpus is credited directly to your registered bank or savings account. And with the outstanding 40 per cent, you have to purchase an annuity plan mandatorily. Which implies, the larger the number, the larger the pension. And the only secret is to start investing early to create a large corpus under NPS.

Reason 2: Pension benefit for your family

Apart from contentment can be offered by a large retirement corpus, you will question what will relate to your family upon your demise. And you must have family commitments that are still not fulfilled. For this, NPS provides you with the alternative of choosing an annuity plan that proceeds to compensate your spouse the pension amount upon your death. Until they are alive, the pension will proceed.

Reason 3: Manage your risk tolerance on your own

NPS has an in-built risk control plan to ensure that the retirement fund is insulated from market fluctuations as you get closer to retirement. You get an alternative that, as you get older, the risk is lowered automatically under NPS. You determine your initial equity-debt mix depending on the risk you are able to take in this auto asset allocation choice. And, every year, as you approach 35, a part of your savings are transferred from stocks to FD-like investment vehicles. This means that when the retirement age arrives, your equity risk is limited and your investment is wealthier.

Reason 4: Low deposit limit

The versatility that it brings for investments is one of the fantastic features about NPS. That is, whenever you want and also how much you want, you can contribute. Just Rs 1,000 a year is the minimum deposit provision. So you can start low, and you can contribute higher amounts as per your need and convenience. Ultimately, the capital can increase massively thanks to the influence of compounding. It also serves as a support for self-employed individuals who do not have a stable salary. Whenever they have additional money ready, they can deposit in NPS.

Reason 5: Taxation beyond section 80C

For tax benefits, most taxpayers use the ways permissible under Section 80C. NPS proposes a tax saving option over and above Section 80C. You can claim exemptions against the contributions to the National Pension System under Section 80CCD of the Income Tax Act. Tax benefits under Section 80 CCD (1) shall be applicable to all subscribers regardless of whether they are employed or self-employed. The maximum deduction that you can claim under Section 80CCD (1) is 10% of your salary (basic salary + dearness allowance) if you are a salaried individual. You can claim up to 20 percent of your overall gross income if you are a self-employed person. In a given financial year, the deduction amount cannot surpass Rs 1.5 lakh.

A new section, launched in 2015, is Section 80 CCD (1B). Under this, you can seek an additional exemption of Rs 50,000 for your contributions to NPS, regardless of whether you are salaried or self-employed. This exemption can be requested above the maximum deduction of Rs 1.5 lakh and can be declared in compliance with Section 80 C. Hence, you can claim up to Rs 2 lakh towards your NPS investment as a tax benefit. Section 80 CCD (2) is only valid for salaried individuals whose employer makes contributions towards NPS which can be equal to or higher than your deposits. Up to 10% of your salary, which includes basic salary and dearness allowance, can be claimed. This exemption can be made in excess of the deductions claimed in compliance with Section 80 CCD (1).

Our take

The tax advantages of NPS do not only cease at the amount of the contribution. You do not have to pay any tax on the returns and the maturity amount as an investor, too. It is because, when it comes to taxation, the NPS falls under the EEE or exempt-exempt-exempt classification. No tax on the amount invested, no tax on the returns earned and no tax on the maturity amount are the three exemptions you enjoy. Overall, NPS is an outstanding retirement investing platform with features such as investment stability and an in-built risk management approach, and several tax advantages. What one has to make sure is that all along they have been faithfully saving for his or her financial purpose.