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National Pension Scheme (NPS) is an essential retirement planning tool. It holds an important place in the overall portfolio of an investor which must include other types of asset classes as well. One can have an income tax exemption on NPS investment up to 50,000 under Section 80CCD. However, investors need to keep in mind other aspects such as more flexibility (ability to choose more or less exposure), ability to invest in equity (not all retirement tools offer this), and a low cost and well-managed product.

NPS investment has two options

Active mode: The investor can evaluate the return annually and switch from equity to debt and debt to equity options in the active mode.

Auto mode: There would be eight fund managers handling the investment and changing from debt to equity.

Should you invest in NPS just for the tax benefits?

“NPS gained popularity since the Income Tax Act introduced an additional deduction of 50,000 under Section 80CCD(1b). This deduction is over and above the deduction of 1.5 lakh allowed under Section 80C. Hence, an investor can claim a deduction of up to 2 lakh by investing in the NPS schemes," said Archit Gupta, Founder and CEO of Clear (previously ClearTax).

Apart from tax savings, NPS helps investors save lump-sum amounts for their retirement.

“NPS is a retirement oriented scheme that offers monthly pension payments and a lump sum amount when the investor attains the age of retirement. This scheme not only helps to save tax but also secures investors retirement life. This scheme has brought the comfort of the monthly pension enjoyed by the government employees to others like employees, freelancers, self-employed, etc.," said Archit Gupta

An investor with an aggressive risk profile can invest up to 75% of its fund in equity. As the investment is market-linked, this scheme offers inflation-beating returns over the long term. This is one of the best investment alternatives amongst tax savings as it invests its corpus into equity and debt portions according to the investor's risk appetite, Gupta added

However, while investing in NPS it has been found that people tend to confuse it with the Public Provident Fund (PPF).

“Generally, people compare NPS with PPF investments and choose between the two. NPS has an annuity option which makes them preferable. NPS can also be opened by people who are self-employed or have another source of income. Also, in NPS, you can invest up to 60% into equity while PPF is purely fixed income, so in a growth environment like the last year, a PPF investor would have made a fixed return of 7.1%, and an NPS holder with 50% equity exposure would have made 25%+ returns. In riskier times and auto mode, the fund managers could dynamically switch to more debt-like instruments giving returns at par with PPM," said Sonam Srivastava, Founder, Wright Research, SEBI Regd. RIA.

Since NPS account maintenance charges are very low, the benefit of accumulated pension wealth to the subscriber eventually becomes significant.

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