You probably don’t need to worry about your retirement if you were born with a silver spoon. But if you are a self-made person, then your investment portfolio is incomplete without the National Pension System (NPS).

NPS was introduced by the Central Government to help individuals have income in the form of pensions to take care of their retirement needs. The Pension Fund Regulatory and Development Authority (PFRDA) regulates and administers NPS under the PFRDA Act, 2013.

Here’s why NPS is good for you.

NPS offers both tax savings and wealth creation opportunities. 

1) Tax Savings:

NPS offers tax benefits under Section 80C of the Income Tax Act. A subscriber can claim a deduction of up to Rs. 1.5 lakh per annum on contributions made to the NPS Tier-I account. This deduction can help reduce the taxable income and consequently the tax liability.

Additional Deduction under Section 80CCD (1B): In addition to the Section 80C deduction, NPS also provides an exclusive deduction of up to Rs. 50,000 under Section 80CCD (1B). This extra deduction is a significant tax-saving advantage for NPS investors.

Additionally, a deduction of up to 10% of Basic salary under Section 80 CCD (2) in case of deduction through salary by the employer for corporate employees under NPS. This deduction is capped at Rs. 7.5 lacs.

Tax Exempt at all stages: While subscribers can claim tax deductions on NPS contributions as detailed in the above-mentioned points, the withdrawal (up to 60%) is also tax-exempt making NPS an Exempt-Exempt-Exempt (EEE) category product. 

Suitable under the old regime as well as the new regime of taxation for corporate employees. Only NPS investment through salary deduction (80 CCD (2)) is available under the new tax regime.

Also Read: National Pension System (NPS) calculator: Save Rs 100/day to get up to Rs 57,000 per month

2) Wealth Creation to fund your retirement:

Market-Linked Returns: NPS allows investors to choose from various investment options, including equity (E), corporate debt (C), government securities (G) and alternate assets  (A). This flexibility allows investors to tailor their NPS portfolio based on their risk tolerance and investment goals. The equity component can provide the potential for higher returns over the long term.

An NPS subscriber can choose to increase or decrease his equity participation (with maximum participation of 75% in the NPS Tier 1 account). A subscriber can also invest up to 100% into an Equity Scheme under an NPS Tier 2 account, but with no attached tax incentives as mentioned above.

Long-Term Savings: NPS is a retirement savings vehicle. It encourages long-term wealth accumulation. This long-term horizon can help in creating a substantial corpus for retirement. Investing in NPS allows you to benefit from the power of compounding over the long term. As contributions grow over time and generate returns, the compounding effect can significantly enhance your investment value and help create substantial wealth for retirement.

Investing in NPS throughout the ups and downs in the economy (capital markets both equity and fixed income) can be beneficial for the Indian investor in more ways than one – it can offer high flexibility in terms of portfolio diversification, bring down tax liabilities, and helps one stay on the path of retirement and pension goals in a systematic way. It is also probably the lowest cost financial savings instrument that is available across the globe as well as being portable across jobs or locations.

This article has been written by Kurian Jose, Chief Executive Officer, Tata Pension Management. Views are personal.