National Pension System: Is NPS the right option for retirement?

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Updated: November 23, 2020 1:29 PM

Choosing an investment tool for retirement can be confusing, however, not investing in the right instrument could mean losing out on the potential returns of the investment. Hence, it's better to understand these investment instruments properly to make an informed decision.

National Pension System, NPS, pension, pfrda, exitThe process of 'self authorization' using offline Aadhaar will help NPS subscriber exist from the scheme easily.

To have a smooth and financially safe retirement, people invest in various instruments starting from mutual funds, stocks, real estate to NPS, EPF, etc. These are some of the most common retirement instruments. Having said that, the National Pension System (NPS) is considered one of the best investment tools for retirement planning in India.

While all investment instruments have their own merits and demerits, NPS investment is largely focused on the retirement of investors. The main purpose of NPS is for the investors to get a pension during their retirement years, along with tax benefits every financial year. According to experts, self-employed professionals, especially those working in the unorganized sector, should look at this scheme.

NPS is totally a voluntary contribution scheme, and one can open an NPS account on one’s own. The minimum contribution for NPS is set at Rs 500 in Tier I and Rs 1000 in Tier-II account. However, there is no maximum investment limit set for NPS accounts. This pension scheme offers investors to choose from 3 options of investment – equity, corporate debt, and government bonds. Hence, with NPS investors have higher exposure to equities, which can fetch higher returns.

An investor can make partial withdrawals made up to 25 per cent from his/her NPS savings, but only after the 3rd year of subscription. Additionally, after an investor reaches the age of 60, he/she can withdraw a lump sum from their NPS corpus of up to 60 per cent. Having said that, one of the main features of this pension scheme is – after withdrawal it is compulsory for an individual to invest 40 per cent of his/her balance in an annuity plan.

On the other hand, with the national pension scheme, subscribers enjoy full tax-exemption up to the limit of Rs 1.5 lakh under section 80C. Subscribers also get tax-exemption of up to Rs 50,000 under Sec 80CCD (1B). Investors can also claim deduction under section 80CCD (2), of up to 10 per cent of his/her basic salary plus dearness allowances, on the employer’s contribution made towards employees’ NPS account.

Industry experts say, choosing an investment tool for retirement can be confusing, however, not investing in the right instrument could mean losing out on the potential returns of the investment. Hence, it’s better to understand these investment instruments properly to make an informed decision.

Even though NPS is considered an ideal option for retirement, its low popularity is due to the lower commission on the sale of the product. However, experts say when compared to other assets in the retirement category, NPS almost stands out with some lucrative features.

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