The National Pension Scheme or NPS is a government initiative that empowers employees, be it those working in public, private, or even unorganized sectors to mobilize their savings to build a retirement corpus. By regularly saving a part of their monthly income into a pension account, individuals can build a reliable retirement corpus and safeguard their retired life. Such a plan offers a steady flow of monthly income in the retired life, making NPS holders financially independent. The scheme is open to all individuals as a voluntary savings option.
On that note, let’s explore the features and benefits of the National Pension System.
Why is the National Pension Scheme Important?
Private sector employees looking to build a reliable income stream, especially for their life after retirement should consider saving their resources in the National Pension System. This government-backed savings scheme is transferable across multiple jobs and locations. In addition, NPS offers substantial tax benefits under the Indian Income Tax Act’s Sections 80C and 80CCD. For individuals who plan to retire early but have low risk-taking capacity can consider NPS as an option.
The guaranteed income from the National Pension System helps retain one’s comfortable lifestyle even after retirement and helps cover living expenses and other obligations with ease. The National Pension Scheme also encourages the habit of smart and disciplined saving via systematic investments, allowing individuals to build a robust corpus with small but regular contributions. It also allows salaried individuals to leverage the tax benefits to boost savings. This makes NPS a viable option for those looking to accumulate savings or maximize their tax deductions. It is relatively safer than investing in just stocks and equity-linked mutual funds, providing individuals with a more stable environment that is ideal for those who are averse to risks.
Key Features of NPS
These are the key features of the National Pension Scheme –
Returns
Unlike fixed-return savings options such as the Public Provident Fund (PPF), the NPS boasts market-linked returns. A portion of one’s monthly contributions gets parked into market equities, yielding higher earnings in the long term. However, such an aspect also exposes an individual’s capital to some market risks. This is because the equity market is volatile and guaranteed returns are not always tangible. NPS is known to generate substantial returns. Regardless, individuals have the option to reassess the funds in their accounts and reallocate how to invest money based on their performance accordingly. This aspect gives individuals control over their returns.
Risk assessment
The National Pension Scheme provides account holders with a blend of growth and stability to build a robust retirement corpus. The scheme ensures this ideal blend by parking a part of their resources in equity funds to help generate higher returns in the long run. However, to help individuals manage the risk quotient, the equity exposure is capped, which also keeps decreasing with the account holder’s age. For instance, for those under the age of 50, the exposure is capped at 75%, allowing the individuals to make the most of potential equity returns. However, for those above the age of 50, the exposure cap is gradually reduced by 2.5% yearly, which touches 50% by the time they turn 60. This aspect helps individuals to protect their retirement corpus from market fluctuation, especially as they near their retirement. Notably, for the government employees the equity cap is fixed at 50% regardless of their age. This aspect reflects the substantial risk tolerance quotient they have due to their stable government jobs. Regardless, this approach to allocation helps balance the potential growth while ensuring risk management. This allows them to keep their retirement savings protected, especially as they approach their retirement.
Regulation
The Pension Fund Regulatory and Development Authority (PFRDA) serves as the watchdog for everyone’s National Pension Scheme. The regulatory body sets the mandatory investment rules and is entrusted with evaluating the performance of funds. PFRDA also monitors the NPS managers that are appointed by the NPS Trust. This makes the NPS a reliable savings avenue.
Flexibility
The National Pension Scheme provides individuals with unmatched flexibility. NPS subscribers can contribute to their account anytime throughout a financial year. They can also adjust their deposit amount based on their needs, and pick the most suited investment instruments for their needs based on their financial goals.
Tax benefits
NPS extends several tax benefits to individuals. Here’s how different individuals can expect to benefit from them –
Salaried Individuals: They can claim a maximum of 10% of their salary under Section 80CCD(1) of the Income Tax Act, within the cap of Rs. 1.5 lakhs under Section 80CCE of the Income Tax Act.
Individuals can avail of tax deductions of a maximum of 10% of their salary on their employer’s contribution, under Section 80CCD(2) on top of the Rs. 1.5 lakhs limit under Section 80CCE. Notably, the cap for central government employees is set at 14%.
Self-Employed Individuals: They are eligible for double tax benefits, with a maximum benefit of up to 20% of their gross income under Section 80CCD(1) of the Income Tax Act of India. However, the same is capped at Rs. 1.5 lakhs under Section 80CCE. Individuals can claim an extra deduction of a maximum of Rs. 50,000 under Section 80CCD(1B) of the act, in addition to the limit set under Section 80CCE.
Besides these, individuals can also claim tax benefits on their NPS benefits. For instance, in case of partial withdrawal, say up to 25%, the contributions are deemed tax-free under Section 10(12B) of the Indian Income Tax Act. At retirement, individuals can withdraw up to 60% of their funds without any taxation under Section 10(12A). On retirement, individuals may buy an annuity with their funds and avail of tax benefits under Section 80CCD(5). Notably, returns on the annuity are taxed as per Section 80CCD(3).
NPS is a powerful savings tool for securing one’s future after retirement. Before subscribing to NPS, individuals should understand their goals, risk tolerance level, and income needs. This approach will help ensure their contribution strategy aligns with their vision.