If you want to create a resilient retirement fund for the future then is imperative to start planning for your retirement right from the time when you start earning. As there are many different retirement plan options available in the market, the government initiated the National Pension Scheme is one of the best options of investment to create a retirement corpus.
The National Pension Scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) India. As one of the safest options of investment, the scheme is specifically designed to secure the future of Indian residents after retirement. Let’s read further to know why NPS should be a part of your retirement portfolio.
Key Highlights of NPS Scheme
- All Indian citizens between the age group of 18-60 years ca open the NPS account.
- The maturity age of the scheme is 60 years, which can be further extended up to 70 years.
- The current interest rate applicable to the investment done in the NPS scheme is 9%-12%.
- The NPS benefit also includes tax exemption U/S 80C of the Income Tax Act up to the maximum contribution of Rs.1.5 lakh made towards the NPS.
Let’s take a look at the top 5 reasons why NPS should be a part of your retirement planning.
- Dual Benefit of Power of Compounding and Low Cost
NPS is one of the most affordable pension investment products available in the market. An individual can start investing in the NPS scheme with a minimum contribution of Rs.500 for the Tier-I account and Rs.250 for the Tier-II account and can invest up to a maximum Rs.6000 in a financial year. Moreover, the investment made towards the NPS scheme is multiplied in the long-term with the benefit of the power of compounding and helps to create a strong financial cushion for a secured life after retirement.
A part of the investment made towards the NPS scheme is invested in equity securities, which offers profitable returns as compared to the other tax-saving investment option like PPF. The scheme offers an interest rate of 9%-12% and is best suitable for individuals who want to gain a high return on investment and create wealth in the long-term.
NPS offers flexibility, as you can choose your pension fund and investment option and see your capital grow. Also, you can switch the asset class and investment option twice a year and can change your pension fund once a year. As per the rule of the equity allocation, you can allocate a maximum of 50% of the investment in equity securities. Moreover, NPS also offers you two different choice to invest in your account i.e.
- Active Choice- In this option, you can select the allocation percentage in the asset classes.
- Auto Choice- In this option, the funds are automatically allocated among the different asset classes in a pre-defined time period as per the age of the subscriber.
- Tax Benefit
NPS scheme also offers tax benefits the same as PPF and EPF. NPS offers tax benefits under the EEE rule i.e. exempt, exempt, exempt. Under this rule, the investment made in the scheme, the interest earned on the contributed amount, and maturity proceeds is all applicable for tax exemption Under Section 80C of the Income Tax Act. NPS also offers additional tax benefits on the contribution of Rs.50,000 over and above the invest in national pension scheme at policybazaar. Thus, you can claim a total tax exemption of Rs.2 lakh.
- Assured Annuity Amount
After the maturity of the NPS scheme, you can withdraw only 60% of the accumulated fund from the account after retirement. However, it is mandatory to purchase the annuity from the rest 40% of the accumulated fund. You can select the annuity service provider at the time of submitting the withdrawal request and after the payment of the lump-sum withdrawal.
The amount of annuity depends on the annuity purchase amount & tenure of the annuity policy. The annuity purchased by you ensures a regular flow of pension income after retirement. As per the information available on NSDL, the minimum age of receiving the annuity is predefined by the Annuity Service Provider (ASP).
- Premature Withdrawals and Exit Rules
As a government-sponsored retirement scheme, it is mandatory to stay invested in the scheme until the age of 60 years. However, after completion of 3 years scheme from the date of initiation, partial withdrawals are allowed. You can make a premature withdrawal of 25% of the total investment made towards the scheme to date. However, withdrawals are allowed only in special circumstances like purchasing a house, sponsoring the child’s education, or in case of any medical emergency. You can withdraw from the NPS scheme up to 3 times in the intervals of 5 years during the entire tenure of the scheme. It is important to keep in mind that these rules are only applicable for the Tier-I account and not for Tier-II account.
- Risk Assessment
Currently, in the NPS scheme, a cap between the range of 75% to 50% exists on the equity exposures. This cap is 50% for the government employees. In the set range, the portion of equity investment will be reduced by 2.5% annually opening from the year in which the investors will turn 50 years of age. This balances the equation of risk and returns for the investors, which means that the invested amount is safe from the volatility of the equity market. As compared to the fixed income investment options, the NPS scheme offers a higher earning potential.
- It Is Regulated
As we know that NPS is a government-sponsored investment product, it is regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). With transparent investment rules and regular monitoring, NPS offers reliability and transparency to the investors. Moreover, NPS is considered one of the safest retirement planning options available in the market, which ensures a guaranteed return on investment and secure the life of the individual after retirement.
Wrapping it UP!
With the above-mentioned reasons, it is clearly justified now why you should invest in the NPS scheme to create more resilient retirement planning.