Savings & investment decisions in India often revolve around tax benefits & short to medium-term financial goals such as home buying, children’s education & marriage, insurance- medical & life, whilst retirement planning takes a backseat. Despite multiple government-sponsored pension schemes like EPF, PPF & NPS, retirement planning for many remain NIL to inadequate, often restricted within tax rebate of 1.5 lakh u/s 80C.
Whether you are a millennial or a generation Z investor, it’s time you review your portfolio and make retirement planning a priority. The basic goal of any retirement plan is to attain financial freedom in the non-working days. Your retirement should mark a second innings, wherein you have enough funds & you do not compromise your lifestyle.
NPS i.e. National Pension System, which is governed by the Pension Fund Regulatory and Development Authority (PFRDA), under the Ministry of Finance, Government of India, is one of the most powerful retirement schemes in India. Any Indian citizen in the age group of 18-70 years can open an NPS account online or offline through a Point of Presence (POP) centre. Each NPS subscriber receives a 12-digit unique PRAN i.e. Permanent Retirement Account Number to operate the account flexibly. You can invest an amount of your choice in select professionally-managed pension funds which are linked to markets and enjoy exclusive tax benefits, good returns & fund security.
Also Read: How can your parents help you save tax & earn more?
Without a further ado, let’s explore some of the lesser known benefits of NPS.
1. Tax benefits on self-contribution:
The exclusive tax benefits with NPS make it as good as EEE (exempt, exempt & exempt). You get dual benefits on self-contribution, employer’s contribution as well as corpus growth. You enjoy exclusive tax deduction, as under:
- Up to Rs. 50,000 under section 80 CCD (1B),
- Up to 1,50,000 under Sec 80 CCE,
(Thus, a total rebate of Rs 2 Lakh. Further, a person with highest income tax bracket saves Rs 15000 in tax @ 30%, exclusive of 4% education cess, by contributing Rs 50000 each year.)
- Tax exemptions on exit. The lumpsum withdrawal as well annuity on exit is tax exempt. Even GST is not applicable. The same benefit is also provided on partial withdrawals as per rules.
2. Tax benefits on Employer’s contribution
Furthermore, the salaried are also eligible for benefits on contribution to NPS account by the employer. On employer’s contribution, the salaried folks are eligible for tax deduction up to 10 % of salary (Basic + DA) under Section 80 CCD (2).
3. Cost effective long term pension-cum-investment
The management cost of equity-linked market products such as mutual funds vary up to 1.5 % to 2 %. However, with NPS management cost is even lesser. The exit and withdrawal NPS expenses are capped at 0.125% of corpus, i.e Rs 125 to Rs 500. The initial subscriber registration is Rs 200 to Rs 400 while subsequent contributions are charged at minimum of Rs 30 or up to 0.50%. Undoubtedly NPS is a cost effective long term pension cum investment option.
4. Diversification & flexibility
Next, you also enjoy ample flexibility i.e. choice of fund manager, asset allocation and portability. Currently you can choose from fund choices:
- SBI Pension Funds Pvt Ltd
- LIC Pension Fund Ltd
- UTI Retirement Solutions Ltd
- ICICI Prudential Pension Funds Management Co Ltd
- Kotak Mahindra Pension Fund Ltd
- HDFC Pension Fund Ltd
- Birla Sun Life Pension Management Ltd.
You can monitor the growth of the pension fund and/ or switch the funds as required. An investor gets an option to choose funds on Active or Auto mode. In Active mode, select assets as class E (equity), Class C (corporate bonds) and Class G (government securities). However, Auto Choice is a default option and picks options according to age.
Each active NPS Tier 1 account subscriber has option to open a voluntary Tier 2 account. Tier 1 a/c has a mandatory pension clause with minimum of 40% fixed annuity after 60 years of age. The investor can make 3 partial withdrawals without any tax liability during lifetime for up to 25 % of self-contribution for children’s higher education, marriage, buying a home, or medical reasons like treatment of critical illness, subject to 3 years of continuous investment. In case of Superannuation or retirement, 100% withdrawal can be claimed for corpus up to Rs. 5 lakh in Tier I.
However, the entire proceeds of Tier 2 can be withdrawn as per needs flexibly. However, no tax benefits are offered on contribution to this account. However, accumulating funds in Tier 2 A/C is better than a bank account as you can invest in professionally managed pension funds and earn higher returns, subject to market performance.
For withdrawal, you need to submit application to the POP along with documents: PRAN Card (original), identity proof, address proof and a cancelled cheque. The application is sent to Central Record-keeping Agency (CRA) and NSDL. CRA registers your claim, processes the application and settles the account.
India should move towards a pensioned society from a less pensioned society. At 41 position out of 44 countries in Mercer’s CFS Global Pension Index Survey 2022, we need to take a good leap for improving our pension arrangements and social security net. Currently, NPS is our safest retirement bet.
Save & invest wisely, Happy New Year!
(By Rajeev Gupta, Business Head, E-Gov Services, Religare Broking Ltd)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.