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National Pension System (NPS) investment right instrument for tax saving and building a retirement corpus

Planning a retirement corpus is essential if you want to live comfortably even after your regular income stops. That is why, during your active working life, you should put away money for your retirement. Retirement planning requires regular savings over a long term period so that you can accumulate a substantial corpus. Building a retirement corpus requires you to invest your savings in a suitable investment avenue which would create the desired funds. One such avenue for retirement is the National Pension System (NPS).

The NPS scheme was launched by the Government of India to allow the public with a market-linked investment avenue for retirement planning. The online NPS scheme allows you to invest for a long term period so that you can accumulate a substantial corpus for when you retire. Here are some salient features of NPS investment –

  • You can choose an online NPS scheme or invest through your bank’s branch. Online NPS investment is more convenient as it allows you to invest right from your home or office 
  • The age limit for NPS investment is between 18 years and 60 years. The scheme runs till you attain 60 years of age and you can even postpone the vesting age by 10 years to get the corpus at 70 years of age.
  • There are two investment accounts – Tier I and Tier II. Tier I account is mandatory and you have to open it to invest in the NPS scheme. Tier II Account is optional and can be opened if you have an existing Tier I Account
  • When you invest in online NPS scheme, you get a PRAN number which helps you track and monitor your investments
  • NPS investments are market-linked allowing you to grow your money with attractive returns and create an inflation adjusted corpus
  • Though NPS is a long term investment, you can withdraw from your corpus partially during the investment tenure. Partial withdrawals are allowed only for specific instances like meeting the cost of a marriage, medical emergency, higher studies, etc. You would be allowed to withdraw up to 25% of your accumulated corpus from the third year of investing into the scheme.
  • NPS investments are tax saving in nature and give you tax benefits both on the invested amount as well as the redemption proceeds.

Tax saving benefits of NPS investment

As mentioned earlier, NPS is tax saving in nature. Let’s understand how –

  • Tax benefits on investments

The money that you put into your NPS account is eligible to be claimed as a deduction from your taxable income. You can claim a deduction of up to INR 1.5 lakhs under Section 80CCD (1) of the Income Tax Act, 1961. Furthermore, if you are looking to save additional taxes, you can do so by investing an additional INR 50,000 in the NPS scheme. This additional investment would be allowed as a tax-free deduction from your taxable income under the provisions of Section 80 CCD (1B). Thus, by investing in the NPS scheme, you can claim a maximum deduction of INR 2 lakhs.

  • Tax benefits on redemption

When the NPS scheme matures, you are allowed to withdraw 60% of the accumulated corpus in lump sum. This lump sum withdrawal is allowed as a tax-free income in your hands.

Why NPS is the best retirement planning tool?

Besides the tax benefit, which is an obvious advantage, NPS proves to be a best retirement planning tool for the following reasons –

  • It helps you create an inflation-proof retirement corpus through market-linked investments. Since the retirement corpus grows according to the trend of the economy, it ensures that your retirement is sufficiently funded
  • The long term nature of the scheme allows your investment to get the benefit of compounding thereby yielding attractive returns
  • After maturity, 40% of the corpus is promised to be paid as lifelong annuities. Moreover, there are different annuity options to choose from. So, the NPS scheme creates a regular source of income even after you are retired.

Given these benefits, you should invest in an online NPS scheme. Start investing at the earliest so that you have the maximum possible tenure to create a retirement corpus. The tax benefit would also help in saving tax allowing a higher disposable income in your hands. So, choose NPS for retirement planning and enjoy the benefits which the scheme has to provide.


Published by Nidhi Mehra

I am blogger with 5 years of experience in writing articles and topics related to finance and funds

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