What Is NPS ? Reasons To Invest In NPS

What Is NPS ? Reasons To Invest In NPS

Posted by Creditkaro

General April 07, 2021

What Is NPS ? Reasons To Invest In NPS

Investing is an integral part of wealth creation. Wealth creation provides financial security and stability which eventually helps you to beat inflation. If your money is sitting idle in your bank account, you merely wasting the amount of potential it has to multiply within days, months, and years. The biggest of investors have always followed one golden rule – “Let your money work for you”.  We as Indians have always had this habit of saving some for a rainy day and our ancestors have always made sure that there is some amount of money kept aside for an emergency or a big obligation in the near future. Today, the world has changed, saving money is not the only solution, because saving money may help you get through the bad days but is not a sustainable solution to your financial problems. Your financial problems are going to stick around longer than your savings and this fact will never change. So, if you are looking for a lot more than usual savings, you must consider viable investment options to provide you a genuine shot at wealth creation. 

Today, we are going to talk about one such Investment which has been a popular and important portfolio in the Indian market. The government had introduced the National Pension Scheme in the year 2004 as a replacement to the traditional pension scheme for government employees. Later, this scheme was opened for public investment as well. 

What is NPS ? 

As an individual, you can make structured investments throughout the year under the National Pension scheme. These funds invested by you are then invested in pension funds and are managed by pension fund managers to earn you ideal returns. You as an investor, can cumulate these funds till you turn 60. The funds keep gaining volume based on the performance in the market. At the time of retirement, the cumulated amount is then invested in an annuity plan to provide for regular pension for investor. 

Why should you invest in NPS ? 

Here are few reasons why NPS is a good investment option : 

Planned by the Government – 

One of the most important reasons to choose the NPS is that this scheme is governed by the Pension Fund Regulatory and Development Authority (PFRDA). So, if you plan to invest in NPS, your funds will be managed by professional fund managers, under the set guidelines by the PFRDA. There are different fund options available for you to choose from, moreover you can also make use of yearly switches to get the best returns on your investment. However, it is especially important that you choose the fund that suits your risk appetite because the investment you choose are market linked hence a certain risk factor always remains. 

Tax savings -

The most essential benefit of the National Pension scheme is an additional INR 50,000 tax rebate which you get, over and above the Rs.1.5 lakhs under Section 80C. According to NPS, individuals are allowed to claim deduction for the investments in their Tier I account, for an additional INR 50,000 under Section 80CCD (1B). This benefit goes on to save additional tax of INR 15,600 each year. 

There is no tax for 40% lump sum withdrawal & 60% annuity purchase model with respect to the withdrawals. According to the scheme you invest a minimum of 40% in annuity. So, if you choose a lump sum withdrawal above 40%, that portion alone will be taxable.

Pension for life – 

As soon as you turn 60, NPS assures you an assured pension. Bigger the cumulated amount, bigger will be your pension amount. The pension scheme has the entry age fixed at 18 years, so the scheme allows you to start planning from an early age and helps you move towards a comfortable post-retirement time. You also get an option of partial withdrawal once you turn 60 and the rest of the amount guarantees you a regular pension coming from the annuity plan. Upon the death of the investor, there is an option for the beneficiary to either continue with the pension plan or withdraw the total amount and close the account once and for all. 

Flexible Investments – 

Another reason to choose NPS is that this scheme allows you to put your money into systematic investments. This scheme allows you to invest at any time of the year, either in lump sum or in small amounts, whichever suits your monthly cash flow. The best part is that the minimum investment required is just INR 1000 per annum with no upper limit. This  provides you with a flexibility to manage your investment conveniently to achieve your desired pension amount. Even if you are a self-employed individual, who doesn’t have a steady income, can take advantage of this scheme, and invest as when they come across surplus money.

Diversification –

The best part about NPS is that it invests in diverse assets, like equity, corporate debentures, government bonds, etc. You as a subscriber have the option of choosing either equity or other funds. You can choose either an Aggressive Life Cycle or a Conservative Life Cycle as per your risk appetite. Also, there is an automatic option in which the fund invests in an age-adjusted combination of equity and debt.

Account Management system –

NPS has a very extensive online portal which allows you to create and manage your NPS account completely online. E-NPS is a user-friendly portal which provides various features that enables you to perform all the functions relating to your NPS account at the comfort of your home. Even if you open an NPS account with a bank or NBFC, you get an online access to an NPS account management system which saves you a lot of hassle. 

Portability – 

When you open your NPS account, you are provided a PRAN number which serves as a unique identification number for your pension account. You can use your pension account across different jobs, different cities, and locations across the country with this PRAN number. So, if and when you switch a job, you can simply give this PRAN number so that the pension amount is credited to your account. 

NPS enables you to save your money systemically for a seamless retirement period. This will also help you foster the habit of savings thus solving the issue of providing you with a sustainable income post-retirement. Moreover, this systematic savings plan can be availed by all individuals irrespective of being salaried or self-employed. This simplified benefit structure basically allows you to make a conscious decision for a relaxed and stress free retirement.