Retirement is a time when you can finally unwind and realize your long-held ambitions. However, if you are financially unprepared, it can be a difficult time.
The National Pension System (NPS) is financial security and stability during old age when people don't have a regular source of income. It is offered by the government under a retirement cum pension scheme. The investors get the dual benefit of tax-saving and retirement planning, by investing in it. It provides a benefit to individuals by way of a deduction under Section 80C.
It not only secures your retirement planning but also saves taxes of up to Rs 2,00,000 a year. Both private and government employees can invest in NPS. The Pension Fund Regulatory and Development Authority (PFRDA) has introduced a few changes in NPS.
NPS offers two categories of accounts as of now:
- Tier 1 Account: Meant for retirement savings for govt and private sector employees along with other Indian citizens
- Tier 2 Account: Meant for general investment
When you want to invest in NPS, you first need to open an account under Tier I before you can consider opening the Tier II account.
| Tier I and Tier II NPS | ||
| Tier I | Tier II | |
| Eligibility | Any Indian citizen between 18 & 65 years of age | Members of Tier I only |
| Lock-in | Till the age of 60 years | Nil |
| Minimum number of contributions in year | 1 | Nil, you can choose not to make any contribution in a year |
| Minimum contribution for account opening | Rs 500 | Rs 1,000 |
| Minimum amount for subsequent contribution | Rs 500 | Rs 250 |
| Minimum number of annual contributions | 1 | Not mandatory |
| Fund management charge | Charges are the same for both Tier I and Tier II accounts | |
| Available asset classes | Same for both
Equity (E): Scheme invests predominantly in Equity market instruments. Corporate Debt (C): Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments Government Securities (G): Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments Alternative Investment Funds (A): In this asset class, investments are being made in instruments like CMBS, REITS, AIFs, etc. |
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| Tax benefits on the contribution | Contribution to NPS Tier I qualifies for tax deduction under Section 80C up to Rs 1.5 lakh.
Tax deduction is available under Section 80CCD (1B) up to Rs 50,000 in addition to Section 80C benefits. |
No tax benefit |
| Taxation on withdrawal | At maturity, the entire corpus is tax-exempt | The entire corpus can be withdrawn, which is added to income and taxed as per the tax slab one falls in |
Therefore, If you want to enjoy your retirement days without having to worry about your expenses, it is advisable to invest in the NPS. By investing early, you can prepare for a hassle-free and peaceful retirement life.
Wealth cafe advice
If you are concerned about your retirement and want to ensure a decent monthly income, then you should opt for NPS. It is an easily accessible, low-cost, tax-efficient, flexible, and portable retirement saving account.