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Business News/ Money / Personal Finance/  Retirement planning: 5 things to remember while investing in NPS

Retirement planning: 5 things to remember while investing in NPS

The NPS is a long-term retirement savings scheme for Indian citizens, offering diversification, tax benefits, and professional fund management. It consists of a dual-tier structure, requires long-term commitment, allows asset allocation choices, and is managed by professional fund managers.

NPS provides tax benefits and professional fund management by experts appointed by PFRDA. Premium
NPS provides tax benefits and professional fund management by experts appointed by PFRDA.

The National Pension System (NPS) is a voluntary, long-term savings scheme designed to enable systematic retirement savings for Indian citizens. Investing in the NPS can be a crucial component of your retirement planning strategy as it offers a blend of diversification through asset allocation, inflation-beating potential, contribution flexibility and professional fund management. 

Its tax benefits (investments into Tier 1) make it an attractive choice for individuals looking to save tax and secure their financial future. Let’s review some of the key things to remember while investing in NPS.

Also Read: NPS new login rules: Two-factor Aadhaar authentication from April 1. Details here

Dual-Tier Structure: NPS operates two structures. Tier-I account is the primary and mandatory account under NPS. It is designed specifically for retirement savings. The Tier-II account is a voluntary savings account that provides more flexibility in withdrawals compared to the Tier-I account. It is an optional account and can be opened only if the subscriber has an active Tier-I account.

Long-term commitment: NPS is designed as a long-term retirement savings instrument. It is important to commit to the system for the long term to benefit from the compounding of returns. The longer your money stays invested, the more it can potentially grow. Under Tier-I Account, subscribers on reaching the age of 60, can withdraw up to 60% of the accumulated corpus as a lump sum. This amount may also remain invested until the age of 75 and may be withdrawn systematically through the systematic lumpsum withdrawal (SLW) option. 

The remaining 40% must be used to purchase an annuity, providing a regular pension income. It's important to note that NPS is primarily designed as a long-term retirement savings instrument, and withdrawals before the prescribed retirement age may have implications on the final corpus and annuity income.

Asset allocation: NPS allows you to choose between equity, corporate bonds, and government securities. The allocation between these asset classes should be based on factors like your risk tolerance, age, and financial goals. It's important to review and adjust your asset allocation periodically based on changing circumstances. There are also options of active choice and auto choice where one can decide on their own, depending on their risk appetite or leave the asset allocation to an algorithm depending on their age.

Also Read: NPS scheme: Why National Pension System does not invest in mid-cap and small-cap companies

Tax benefits: NPS offers attractive tax benefits:

  • Deduction of up to 1.5 lakhs under Section 80 CCD (1) of the Income Tax Act (applicable to old regime only).
  • A further deduction of up to Rs. 50,000 under Section 80 CCD (1B) of the Income Tax Act exclusively for NPS investments. (applicable to the old regime only).
  • Further, subscribers under the Corporate NPS model can get additional tax benefits under section 80CCD (2) of the Income Tax Act on investment up to 10% of Basic Salary. This benefit is capped at 7.5 lakhs (including PF, Superannuation fund and NPS) (applicable to both old and new regimes).

Professional fund management: Professional fund managers appointed by Pension Fund Regulatory and Development Authority (PFRDA) manage the NPS. Their expertise can be crucial in making investment decisions, especially for individuals who may not have the time or knowledge to actively manage their retirement portfolio.

Also Read: How EPFO subscribers can update bank account details in their EPF account?

Understanding these key features will help individuals make informed decisions when participating in the National Pension System, contributing to effective retirement planning.

Kurian Jose, CEO, Tata Pension Management

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Published: 26 Mar 2024, 11:53 AM IST
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