The National Pension System, or NPS, has emerged as a preferred instrument for retirement planning across India, thanks to its structured approach towards ensuring financial security post-retirement. NPS comprises two tiers, each designed with specific features to cater to the diverse needs of savers. Subscribers can choose their contribution amount and frequency based on their financial goals and capacity.
Tier I is the primary account, mandatory for all subscribers, focusing on accumulating retirement savings. This account has restrictions on withdrawals, allowing them only under certain conditions, such as retirement, critical illness, or for specific expenditures like education or home purchase. The aim is to ensure that the subscriber has a substantial corpus at retirement.
How much tax do I have to pay? Calculate now
Tier II is an optional account, offering greater flexibility regarding withdrawals. Subscribers can deposit and withdraw funds from this account at their convenience. However, this category doesn’t enjoy the tax benefits of Tier I accounts.
NPS offers a choice of investment options, including equity, corporate bonds, and government securities, allowing subscribers to tailor their investment strategy according to their risk appetite and investment goals.
Senthil G, Chief Business Development Officer - India & Global, KFin Technologies Limited, says, "NPS allows investors to diversify investments across various asset classes – Equity (E), Corporate Bonds (C), Government Securities (G), and Alternate Investment Funds (A). This diversification strategy helps investors to achieve stability and growth over the long term."
NPS funds are managed by professional fund managers appointed by Pension Fund Regulatory and Development Authority (PFRDA), ensuring optimal management and diversification of investments.
"The tax benefits under NPS, particularly for Tier I, are a significant attraction. Contributions to Tier I are eligible for tax deductions under Section 80CCD (1) of the Income Tax Act, within the overall ceiling of Rs 1.5 lakh under Section 80C. Moreover, subscribers can claim an additional deduction for investments up to Rs 50,000 under Section 80CCD (1B), which is over and above the limit of Section 80C," he said.
Also read: Irdai tells insurers to step up efforts to trace rightful recipients as unclaimed funds pile up
Also read: India sees 8.5% jump in the number of CFP professionals
Also read: Extreme weather leads to about 50% jump in reinsurance rates for property catastrophe insurance
Employer contributions to NPS are also tax deductible under Section 80CCD (2), and this deduction is not subject to the Rs 1.5 lakh limit under Section 80C. This makes NPS an attractive option for employees as part of their retirement savings plan. At the time of retirement, up to 60% of the corpus withdrawn in a lump sum is tax-free. At the same time, the remaining must be used to purchase an annuity, which is also tax-efficient, as the annuity income is taxed as per the individual's tax slab in the year of receipt. This way, NPS helps individuals build a substantial retirement corpus over time through regular contributions and investment growth.
NPS accounts are portable across employers and locations, providing subscribers with flexibility and convenience in managing their retirement savings. It is regulated by PFRDA, which ensures transparency, accountability, and security of investments for subscribers