Unlocking the Benefits of NPS: Your Guide to the Government-Approved Pension Scheme

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An Overview

The New Pension Scheme was started by the government to encourage government employees for retirement planning. Later, it was opened to the general public, and there are 10 reasons for choosing NPS as an instrument for a portfolio.

10 Reasons for Choosing NPS as an Instrument for a Portfolio

NPS works like a mutual fund and offers you the most economical instrument to invest in a mutual fund. Generally, a mutual fund charges approximately 1% towards expenses, but NPS charges only 0.3% towards expenses. This gives you a benefit of over 0.7% on a recurring basis. If you have a long-term horizon, then it increases your total corpus.
Fund Management: It is goal-based management. It is dynamic because debt exposure keeps increasing post age 50, giving security to your fund.
Tax Rebate under Section 80 CCD (1B): Saving under section 80 C is limited to Rs 150,000, but you can increase it to Rs 2 lakh by investing in NPS. This means you save an additional Rs 15,000 from taxes if you are in the 30% tax bracket.
Tax Rebate for employees under section 80 CCD (2): You can save further on tax if your employer contributes 10% of your salary towards NPS. Your employer needs to contribute as part of CTC, and the full contribution is not added to your income. (Government employers can contribute up to 14%)
Tax-Free Maturity – Unlike mutual funds, NPS gives you tax-free maturity. In mutual funds, capital gain up to Rs 1 lakh is tax-free, and other capital gain is taxed at a rate of 10%. In NPS, you are allowed to withdraw 60% of proceeds, and all 60% is tax-free under section 10 (12 A). Moreover, 40% of proceeds are used to buy annuity, and this 40% is also tax-free.
Liquidity in an emergency: After 3 years, you are allowed to withdraw 25% of your own investment for family goals and emergencies.
Long-Term commitment: As NPS is used for long-term retirement purposes, hence you do not use it for any other purpose. Market returns are maximum with time in the market.
Flexibility: You can do systematic as well as lump sum investment as per your own requirement. Moreover, you have two types of accounts i.e. Tier 1 and Tier 2. Tier 2 accounts are allowed only to Tier 1 account holders and can be used like any other mutual fund account.
Easy access: Like a unique PAN number, you have a unique PRAN number in NPS. This PRAN number is a must to open an NPS account.
Regulation PFRDA: NPS is regulated by a government body called PFRDA, hence have all government security towards your account safety.