National pension scheme (NPS) is a long-term investment option for retirement that falls under the purview of PFRDA (Pension Fund Regulatory & Authority) and central government. This pension scheme provides a lump sum corpus and periodic annuity (as monthly pension) during the retirement years, which makes it one of the suitable retirements and pension planning schemes. Note that this scheme is open to all employees from private, public, and unorganized sectors except for those belonging to the armed forces.
Here are some of the top NPS benefits:
- Source of earning after retirement
After retirement, while your source of income stops, your daily mandatory expenditures continue. And on factoring in the inflation, the expenditure becomes more than your current lifestyle expenses. Investing in NPS can ensure you to keep up with your monthly income in the form of a pension.
Once you reach your retirement age, your NPS matures and up to 60% of your corpus is automatically transferred to your savings account while the remaining 40% is transferred to an insurance company to provide you with a regular pension. It means, bigger your retirement corpus, bigger would be your pension. The only way to form a huge retirement corpus in NPS is to begin investing early.
- Guaranteed returns
While a part of NPS gets invested in equities, which might not provide assured returns, the entire returns from NPS is guaranteed. In addition, their returns are higher as compared to various other traditional investment schemes like fixed deposits (FD) and public provident funds (PPF).
- Low risk investment plan
In comparison to several other investment schemes, the national pension system (NPS) holds lower risk. Moreover, being owned by the government, the risk cap ranges between 50 and 75 percent on equities. For government employees, the cap is 50 percent. In the above-prescribed range, exposure to equity lowers by 2.5 percent every year starting from the year when the subscriber turns fifty years old.
However, for investors having sixty years or above, this cap is fixed at 50 percent. Exposure to equity in NPS offers higher earning opportunities at lower exposure risk. Thus, as compared to other fixed income instruments, the earning potential of the national pension scheme is higher.
- Financial assistance to dependent after death
While a huge retirement corpus can endow you with mental peace, you may still wonder how your dependents would manage after your demise. Your spouse may live for a long time after your death. Moreover, you may even have several family obligations that are important to be met.
The NPS scheme gives you the choice to pick a plan that would continue to pay the pension to your spouse even after your death. This plan would continue until your dependent is alive.
- Flexibility with comfort
The scheme provides great investment flexibility. One can invest any amount anytime depending upon their convenience. While there is no upper limit on the investment amount, tier 1 accounts should receive a minimum contribution of Rs 500, and minimum contribution of Rs 1,000 in the case of tier 2 at the time of account opening. Note that in a financial year, it is mandatory to invest a minimum of Rs 6,000 in tier 1 and Rs 2,000 in tier 2 accounts. Thus, as it is not mandatory to invest a specific amount in NPS every month, one can begin with a small investible amount and as per their growth in income begin investing a bigger amount to gain the power of compounding. This flexibility in NPS acts as a benefit particularly for the self-employed individuals as they do not have a stable income. They can invest their funds whenever they gain extra income.
- Tax benefits over and above Section 80 C
NPS tax benefits are beyond Section 80 C. Contributions made towards NPS are eligible for tax deductions of up to Rs 50,000 as per Section 80 CCD (1B). It is over and above the Section 80 C that you can avail on investing Rs 1.50 lakh, which means you are allowed a tax deduction of up to Rs 2 lakh overall.
Final take away
With features such as investment flexibility, tax benefits, and in-built risk reduction strategy, NPS serves as an excellent retirement tool. To avail its benefits, you just need to invest a specific sum towards it and accordingly increase the investible fund with growth in your income. Doing so would assist you to accumulate a higher retirement corpus.