The national pension system is a pension system introduced by the Indian government and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS helps individuals to plan for the 2nd innings of their life. Anyone above 18 years of age and has Indian citizenship is eligible to start investing in NPS, and the minimum investment amount is ₹ 500/ month. One can get a part of the corpus amount as the lump sum amount and another part as an annuity at maturity. One can withdraw up to 20% of the amount as lump sum money on premature exit (should have invested for at least 10 years), whereas up to 60% when you are 60.
Find more about NPS and estimate the amount you can get if you start investing now.
Some of the benefits are listed below:
For the new-age investors, it is one of the most important things. NPS fund managers invest in equity (E), corporate bonds (C), government securities (G) and other alternative investments (A). But there is a catch, any person applying for the NPS gets an option to choose between the following:
a. Active Choice: Here, an individual can decide the asset allocations between E, C, G and A. However, the maximum allotment for the equities is 75% to save an investor from high market risk. An investor can change the allocations up to 2 times in a financial year.
b. Auto Choice: It is a good choice for passive investors and allows them to choose between 3 Life cycle funds:
- Aggressive: Equity allocation can go up to 75% under 35 years of age, with every year onward, the limit drops by 2.5%
- Moderate: Equity allocation is 50%
- Conservative: Equity allocation can go up to 25%
The investor can switch between pension choices and fund managers if the investors are not satisfied with the performance of either of the two things. A premature withdrawal can be made upto 25% of the money invested. This can be done only when the investment has been made for a minimum of 3 years and genuine reasons such as the marriage of their children, medical treatment or education.
2. Tax benefits
NPS comes under the EET (Exempt from deposits, exempt from capital gains and lump sum withdraw, taxable annuity) category, but while withdrawing, only the lump sum amount (up to 60% after maturity and up to 25% in case of premature exit is allowed) is partially tax-free (upto 40% after maturity and up to 25% for premature exit), whereas annuity that you buy from any of the provider services will be considered as income, therefore, will be taxable. With a Tier- I account, an individual can claim upto ₹1.5 lacs of deduction under Section 80CCD(1) and ₹50,000 deduction under Section 80CCD(1B). Therefore, as a scheme, it allows deductions up to ₹ 2 lacs. Employers can also invest on your behalf and can avail of tax deductions under section 80CCD(2), 10% of the Basic dearness allowance. Employer’s Contribution towards NPS up to 10% of Basic + DA can be deducted as ‘Business Expense’ from their Profit & Loss Account.
For instance, if an individual has ₹ 1 crore of the corpus at the age of 60, one can take ₹ 40 lacs of the amount tax-free as a lump sum amount and then buy an annuity from any registered service providers. The income from the provider is taxable.
Tier-II account can be made if you have a Tier-I account with benefits such as no minimum balance required, transfer funds directly to a Tier-I account, no exit load charges, etc. With the above benefits, one can easily understand investing targets and take a call to invest.
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