Retirement Planning: Should You Opt For NPS?

Retirement planning starts the minute one starts working. While one scheme will not cater to all the needs, consider the National Pension Scheme (NPS) by the Government of India. The social security initiative is available to all citizens of the country. 

The scheme’s primary purpose is to provide retirement security for its subscribers through pension post-retirement and tax benefits. The minimum contribution is Rs.500 for Tier-I accounts and Rs.250 for Tier-II accounts. It is considered one of the world’s lowest-cost pension schemes. 

Since a portion of the NPS gets invested in equities, the returns offered are higher than other investments like Public Provident Fund (PPF). The equity exposure reduces by 2.5% annually, starting from the year the subscriber turns 50. For 60 years and above, the cap of equity exposure is 50%. These measures help make the corpus more stable from the volatility of the markets. 

One of the most lucrative offers is the tax-saving benefits of NPS. Under Section 80C, subscribers are eligible for a tax exemption of up to Rs.1.5 lakh. Under Section 80CCD (1B), Rs.50,000 tax exemption is allowed. Under Section 80CCD (2), the least of the employer’s actual contribution, 10% of the sum of the basic salary and dearness allowance or the total gross income, is considered.  

The money contributed is invested by fund managers or pension schemes. There is flexibility in changing the fund managers or pension scheme if the performance is not satisfactory. Subscribers also have the flexibility to decide how much they wish to invest up to 50% in equity. There are options of auto or active choices, whether one wants their portfolio made for them, or they choose their investments actively.

Compared with the PPF, returns by NPS depend on the performance of the market and the PPF gives guaranteed returns on investment. PPF invests the contribution in the National Small Savings Fund, which provides backing from the Central Government. In contrast, NPS invests the contribution in equities, government securities and bonds. Due to this, the returns and interests of the two schemes vary.

PPF has a more stable rate of interest, decided quarterly, while NPS rates depend on the markets. PPF provides more stability, and NPS can offer higher returns, subject to market performance. The maximum tax benefit provided by PPF is up to Rs.1.5 lakh per annum, while NPS provides up to Rs.2 lakh per annum.

For any clarifications/feedback on the topic, please contact the writer at jyotsna.singh@cleartax.in