Is NPS the best retirement option?
- December 8, 2021
- Posted by: MvM Team
- Category: Retirement Planning
NPS is considered to be the most reliable amongst other retirement planning schemes like PPF, EPF, etc., as it renders higher returns due to the presence of equity aspect. It is also helpful for individuals who are looking to save extra tax.
Here are some of the benefits of NPS you must know before investing:
- Portability– An individual can access its NPS account anywhere from India. An individual can open his account in any state and access it from any other state all over India.
- Better long-term returns– As some portion of the subscribers’ funds gets invested in equities, NPS yields better returns of about 10 – 12% p.a. in the long term vis-a-vis other traditional retirement schemes like PPF which gives lower returns of 7-8%.
- Flexibility– There is the flexibility for subscribers to choose their fund manager themselves along with the privilege to change them every year, if required.
They can also choose from various investment options and select the debt/equity allocation percentage as per their risk profile.
Voluntary – Any citizen can voluntarily opt for this scheme except for the government employees who are mandatorily required to contribute under NPS.
- Tax breaks and tax-free returns– Individuals, employers, and employees can claim tax deductions under NPS of up to ₹2 lac, including ₹50,000 deduction which is only available in NPS under section 80CCD.
- Transparency– NPS account holder can access their account online to make contributions and track investments, i.e., there is complete transparency of the funds allotted by Fund Managers.
- Risk Assessment– A cap is put in the range of 75% to 25% on the funds invested in the equity market. Once the subscriber attains the age of 50 years, equity portion starts reducing by 2.5% every year till the coming 10 years. After the age of 60 years, the equity portion gets capped at 50%. It keeps the investor safe from equity market volatility.
Tax Benefits of NPS
Tax benefits get claimed in the Tier I account only, not in the Tier II account. Hence, PFRDA provides various lucrative tax benefits to encourage people to grow their investments for the future. Following are the tax benefits under this scheme –
Section | Benefit |
80CCD (1) | It covers the tax deduction of up to ₹1.5 lakh |
80CCD(1B) | It covers the additional tax deduction up to 50k contributed in Tier I of the NPS A/c. |
80CCD(2) | The NPS account, when opened by the employer, allows them to invest up to 10% of (Basic salary + DA) in its employee’s account. An employee can also claim this as a deduction. The employer can also claim tax over this contribution by showing it as a business expense. |
NPS is also qualified for EEE benefits, i.e., Exempt Exempt Exempt, which are –
Exemption 1 – No tax on the amount invested, as explained above.
Exemption 2 – No tax on the returns generated through the investments
Exemption 3 – No tax on the withdrawal of maturity amount, upto 60%, remaining 40% which has to be invested in an annuity is taxable as per the income tax slab of a person.
NOTE:
- The total deduction of up to ₹2 lakhs gets claimed by the subscriber. It includes deduction over the employer’s contribution as well.
- Under section 80CCD (2), the government employees are eligible for a deduction of up to 14% for central government contributions.
- Self-employed subscribers can claim up to 20% of their gross income.
NPS Vs Mutual Fund (Long-term investment)
Factors | NPS | MF (ELSS) |
Risk | Moderate | Moderate |
Aim | Equity (up to 75%) + Debt investment | Equity (up to 100%) + Debt investment |
Liquidity | Low | High |
Tax benefit | Higher (up to ₹2 lakh a year) | Lower (up to ₹1.5 lakh a year but long-term capital gain tax is applicable) |
Returns | 8-14% | 8-15% |
Pros | Low fund management cost of tier 2 A/c | 3-year Lock-in-period is comparatively very less |
Cons | Amount is locked for a very long term and can be only withdrawn at the time of retirement. | Can be riskier as there is 100% exposure to equities. |
