If you are a working professional, chances are that you already overheard people talking about investments and tax saving and whatnot. One term that you must have already come across would be the National Pension Scheme, commonly known as NPS. Now, if you have been wondering ‘what is NPS and should I invest in it?’, we are here to help you out!
What is NPS?
The National Pension Scheme in India is a voluntary long-term investment plan for salaried individuals. The Central Government launched the National Pension Scheme as a social security programme. Except for members of the armed forces, employees from the public, private, and even unorganised sectors are eligible to enrol for this pension programme.
The scheme encourages members to make periodic contributions to a pension account while they are still employed. The subscribers can withdraw a specified amount of the corpus after retirement. After retirement, as a holder of an NPS account, you would get the leftover sum as a monthly pension.
Previously, only Central Government personnel were covered by the NPS programme. However, the PFRDA has now opened it to all Indian nationals.
NPS is an immensely valuable scheme for anyone who works in the private sector and wishes to save for their retirement days. The scheme is also an excellent tax saving option under section 80C investment options.
Tax Benefits of NPS
Now that you are aware about what is NPS, the next step would be to understand what is NPS’s tax benefits and whether you should invest in it or not. While it is a great long-term investment plan, you must know that NPS subscribers can only claim deductions against investments done in Tier 1 account.
Now, what is NPS Tier 1 account you may ask? Tier 1 NPS accounts are the most basic accounts in the NPS scheme. Under the Tier 1 account, subscribers can withdraw just 20% of their contribution before reaching the age of 60, while the balance of the money — 80% — is used to buy an annuity from a life insurance provider.
Now let’s get to what are NPS’s tax benefits that make it worthwhile.
Tax Deductions under Section 80C
NPS is one of the investment choices provided under Section 80C where you can invest and save tax. This part has a deduction limit of Rs. 1.5 lakhs, and you can invest the entire amount in NPS and claim the deduction if you like.
Tax Deductions under Section 80CCD (1B)
This is a special tax break available only to NPS investors. This provision allows subscribers to claim tax deductions for investments of up to ₹50,0000 under NPS contribution tax exemption. This is in addition to the deduction available under Section 80C.
So, by investing in NPS, you can claim a tax deduction of up to ₹2 lakh where ₹1.5 lakh is under Section 80C and another ₹50,000 is under Section 80CCD (1B). This means that if you are in the 30% tax band, you can save ₹62,400 in taxes.
Tax Deductions under Section 80CCD (2)
Since this benefit is based on the employer’s contributions to NPS, it is only available to salaried employees and not to self-employed individuals. This clause allows government employees to deduct 14% of their pay as a tax deduction. Meanwhile, for private sector employees it is capped at 10% of their salary.
What is NPS’s Post-Retirement Income
Whenever you are investing in a retirement plan like NPS, you are probably concerned about what is NPS’s post-retirement income. Here’s what you should know about it:
The structure of the fund options offered by NPS is comparable to those of mutual funds. NPS is a market-linked financial product rather than one with a fixed rate of return. Since their start, various NPS programmes have produced returns ranging from 9 to 12.7%, while over the previous five years, returns have been in the range of 8.1 to 13.3% (as on March 31, 2022).
For instance, if a 30-year-old invests ₹15,000 per month in an NPS, their corpus will be worth ₹3.4 crore by age 60 assuming an annualised return of 10%. The monthly pension payment equals around ₹1.7 lakh if the NPS member chooses to receive annuity on the full corpus at an anticipated rate of 6% per year. You can use an NPS calculator to determine how much to save after accounting for inflation and plan for your retirement accordingly.
NPS is ideal for someone who is confused about selecting the best investing possibilities in the market. With an idea about what is NPS, what is NPS’s tax benefits, and what is NPS’s post-retirement income, you can make an informed decision and invest in the scheme without any worries. By investing in the National Pension Scheme, not only do you save for your golden years, but you also develop a habit of saving for a rainy day.
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