Improved health facilities have increased the life expectancy of Indian citizens. This means people now have to plan for more years after they retire. These factors make it essential for people to plan their retirements properly to ensure their post-retirement incomes remain at par with rising costs due to inflation.

Insight into the National Pension System (NPS)

In 2003, the Indian government established the Pension Fund Regulatory and Development Authority (PFRDA) with the objective of developing the pension segment. With this aim, the NPS was launched in January 2004 to provide incomes for retirees from all economic segments. This scheme is a step to initiate reforms in the pension sector and develop the habit of saving among the population.

Every subscriber must avail of a Tier I account, which requires a minimum annual contribution of INR 6,000 and has prematurity withdrawal restrictions. A second voluntary Tier II account with no minimum contribution and no withdrawal limitations is also available. On successfully opening the account, subscribers are issued a unique Permanent Retirement Account Number (PRAN), which makes the national pension system portable.

In addition to the tax benefit of INR 1.5 lacs available under section 80C of the Income Tax Act, the NPS scheme offers a tax benefit of INR 50,000. This allows people to reduce their tax liabilities. To understand the potential savings that may be earned through investing in NPS tax benefit, subscribers may use calculators that are available on renowned websites, such as Kotak.

Benefits available to the employees

• Central and state government: Investing in the National Pension System is mandatory for all central and state government employees who have joined service after 1^st January 2004. These employees are required to contribute 10% of their basic salary plus the dearness allowance (DA) to the NPS scheme. The same amount is contributed by the government to the employees’ NPS accounts. This means that subscribers are able to accumulate a larger corpus during their working years, offering them higher returns on maturity and more pensions during their retirement years.
• Corporate employees: The NPS is available for individuals aged between 18 and 60 years. Corporate entities may co-contribute to the NPS scheme to enjoy certain benefits like cost efficiency and reduced work. Contributions made by companies in the employees’ NPS accounts are deductible as expenses, which will help save corporate taxes.

Advantages of NPS

• Lower costs: When compared to investing in other financial products, such as mutual funds, the costs of investing in the National Pension System are lower. This means a higher component of the contribution is invested, enabling subscribers to earn more returns on their investments.
• Flexibility and transparency: Using the unique PRAN, employees may easily move their NPS accounts in case they change their location or employment. Moreover, the scheme is transparent and highly regulated by the PFRDA. Subscribers may also retain control over how their contributions are invested in various assets, such as government securities, equities, and corporate bonds.
• Tax benefits: The NPS tax benefit, offered by the Finance Minister Mr. Arun Jaitley, of an additional deduction of INR 50,000 u/s 80 CCE has significantly increased the number of private subscribers to this scheme. Combining the existing benefit of INR 1.5 lacs and the NPS benefit, the total tax advantage available to investor amounts to INR 2 lacs. This will help people to save a significant amount of taxes.

The simplicity, transparency, versatility, efficiency, and, the cost of the National Pension System (NPS) makes it an excellent product to include in your investment portfolio. Considering this investment vehicle in your overall retirement plan is recommended.

Sponsored post by Kotak Bank