Introduction

Retirement is a stage of life that comes sooner or later. It is necessary to achieve financial freedom to live a worry-free lifestyle post-retirement. Few people have lifetime pensions guaranteed by the Government. But most of the people work in the private sector. There is widely used products of Employee Provident Fund (EPF) and Employee Pension Scheme (EPS), but this did not fill the gap. To address this need National Pension System (NPS) was launched by the Government. The National Pension System is a robust, government-backed scheme designed to provide long-term financial security among the various investment options available.

Understanding the National Pension System (NPS)

NPS is a voluntary, defined-contribution retirement savings plan. Voluntary, so that one can save any amount at their comfortable frequency. Defined contribution means, your final corpus will depend upon your contribution and returns over the years. The aims was to regularly contribute to a retirement corpus.

Key Features of NPS

Dual Account Structure: A tier-I account is a basic NPS account, which comes with specific rules of contributions, lock-in, and tax deductions. Withdrawal, etc. It is a mandatory account for NPS subscribers. Tier-II accounts is optional for NPS subscribers. It is a voluntary account that allows you to contribute and withdraw funds without restrictions.

Investment Flexibility: NPS offers a lot of flexibility regarding contributions, investments, and withdrawals. You can design your portfolio by allocating between equity (Class E), corporate debt (Class C), government securities (Class G), and alternative investment funds (Class A), depending upon your risk appetite and return expectations. 10 pension fund managers manage investments of NPS subscribers. These fund managers are Aditya Birla Sun Life, Axis, HDFC, ICICI, Kotak Mahindra, LIC, Max Life, SBI, Tata, and UTI Retirement. One can choose any of the fund managers. You can also change the fund manager if you find their performance not sufficient.

Regulated Framework: NPS works under a regulated framework. It is managed by the Pension Fund Regulatory and Development Authority (PFRDA).

How NPS Works

You need to contribute regularly till your retirement. During this period your funds grow depending upon your asset allocation. Upon retirement, 60% of the corpus is allowed to be withdrawn as a lumpsum amount, while 40% of the corpus will be compulsorily used to purchase an annuity for a pension amount.

Benefits of NPS for Retirement Planning

The NPS offers various of benefits and this makes it a top choice for investors. Let’s explore its advantages in detail.

Tax Benefits Under NPS

After the launch of the NPS scheme, it did not pick up initially. But once the Government added tax saving benefit with NPS, it took not much time to become popular. Now tax efficiency of NPS is one of the most attractive features. Contributions to NPS are eligible for tax deductions under:

• Section 80CCD: You can claim up to ₹1.5 lakh per annum as part of the overall 80C limit.
• Section 80CCD(1B): An additional deduction of ₹50,000 is exclusively available for NPS contributions. This is applicable for old tax regime only.
  This means you can save up to ₹2 lakh annually, making it a tax-saving powerhouse for retirement planning.
• Section 80CCD(2): Contribution made by employer towards NPS is tax deductible. This is applicable to both old and new tax regimes.

Flexible Investment Options

NPS offers two investment modes:

• Active Choice: You can manually allocate a percentage of funds to be invested between equity, corporate bonds, and government securities. Once you set the allocation, your contribution will get automatically invested. You can also change the allocation.
• Auto Choice: Your funds are allocated automatically based on your age, following a predefined lifecycle fund. In this more allocation is towards equity at young age, while the allocation towards equity is lesser when retirement comes to closure.

This flexibility helps investors tailor their portfolios based on their risk tolerance and financial goals.

Compounding Effect for Long-Term Growth

NPS leverages the power of compounding, as your funds are invested for long term at very low fee. Funds are allocated automatically. Any returns from dividends are reinvested to generate additional earnings. So dividends are also tax-free. If you can start early and contribute consistently, it will lead to substantial growth in your retirement corpus.

Portable and Inclusive Nature of NPS

Portability is one of the special features of NPS. You will have same NPS number, even if you change job or change place. NPS is also inclusive. Anybody can open NPS account, whether you are salaried, self-employed or a homemaker. Recently, the Government has launched NPS Vatsalya, wherein parents can open NPS for their kids, which can be handed over to kids, once they become adults.