Why one should consider NPS as one of the retirement solutions?

W

In 2004, to provide a systematic architecture to the pension and retirement needs of the citizen of India, Government had launched defined contribution scheme known as National Pension System which allows citizens to effectively plan for their retirement through safe and reasonable market-based returns. It is regulated by PFRDA (Pension Fund Regulatory and Development Authority) controlling authority to ensure the transparency and efficient working of pension fund schemes.

Any Indian citizen & NRI of age 18 – 70 years are eligible to open the account, it can be extended for 5 more years. NPS account is opened individually i.e. no joint holding. Individuals are not allowed to open multiple accounts; thus, an individual can only have one account.

The product is simple to understand – you can invest 1.5 – 2 lakh rupees per annum (Eligible for 80C & 80CCD(1B) deduction, it gets accumulated and grows till your age of 58/60 and then the Capital so created, is used to provide Annuity / Pension to the client for life. The Account holder, also known as Subscriber, can then use the accumulated corpus to generate pension.

Under NPS two types of accounts are available:

• Tier -1 Account: This is non – withdrawable investment account for retirement. Multiple tax benefits are attached with the same.
• Tier-2 Account: This is a voluntary saving facility. One is free to withdraw savings from this account as desired.

INVESTMENT OPTIONS:

NPS subscribers have to choose from 2 investment options:

1) Auto Choice: Here investments are made in specified asset classes based on lifecycle approach. Here, the money will be invested in Equity(E), Corporate debt(C), Government securities(G) based on subscriber age.

2) Active Choice: Here, the subscribers decides’ the allocation of investment in Equity(E) Corp. bonds (C) and Govt. Securities(G) & AIF’s. Though allocation of investment can be change twice in a Financial Year.

Features of NPS:

• High Potential Returns: It offers high potential returns as the funds we contribute in NPS is further invested in equity and debt funds. It gives 8%-10% growth per year.
• Pension for Life:  At retirement, the entire corpus is converted into an Annuity to generate Monthly pension for life of the subscriber
• Low Cost Structure: The cost structure of NPS is very low as compared to other instruments, as the fund manager charges only 0.01% of your corpus.
• Offers flexibility: In NPS, subscriber is free to choose their own investment options as well as fund managers, in case they are not satisfied they can change their fund managers and can switch between their investment preferences. So, it provides lot of flexibility to the subscriber.
• Professional Management: Here in NPS all the contribution made by investors are handled by professional fund managers who have better understanding of financial markets & expertise in selection of the securities which in turns provide good returns.
• Transfer: Subscriber is allotted with a unique PRAN (Permanent Retirement Account Number) which is portable in case subscriber changes the job and want to shift his POP (POINT OF PRESENCE) i.e. where he opens his account.

• Tax Benefits:

Tier – 1

1. Self Employed: Eligible for tax deduction up 2 Lakh rupees per annum – Rs. 1.5 Lakhs under 80C + Rs. 50,000 under 80 CCD(1B)
2. Employees: Eligible for tax deduction up to 10% of salary (Basic + DA) under 80 CCD (1) contributed by the employer & self-contribution deduction is restricted to Rs. 1.5 Lakhs

Hence total benefit of Rs 2,00,000 i.e. u/s 80C Rs 1,50,000 and U/s 80 CCD(1B) Rs 50,000. Plus at Maturity, 60% of the corpus is withdrawable Tax free.

3.Pension received from pension fund is taxable.

Tier – 2

1. Tier – 2 does not have any tax benefit.
2. The returns on Tier – 2 are also taxable.
3. Tax benefit is only for Government employees. So, for Government employee’s investment in Tier – 2 is eligible for tax deduction up to Rs 1,50,000 U/s 80 C, but will have a lock in period of 3 years.

Conclusion:

National Pension scheme has multiple benefits and has evolved over time in terms of Retirement & Tax benefits. It comes with personalized feature of choosing Asset Classes as per the subscriber’s risk appetite, and with a long lock-in period, we are giving chance to our money to grow. Thus, we should consider NPS as one of the important retirement tool.