Is investing in NPS a smart decision?

Is investing in NPS a smart decision? 1

Retirement planning is important to achieve complete financial freedom and maintain the quality of your lifestyle in your post-retirement years. Investing in retirement savings schemes like the National Pension System (NPS) can be a smart way to build a retirement corpus to make your later years stress-free. NPS allows individuals to construct a strategic investment plan for retirement systematically and enjoy various benefits, including quick account opening, different investment options, tax exemptions, partial withdrawals, etc.

Still can’t decide if NPS is the right option for retirement planning? Here are some crucial NPS features that will help you understand whether investing in the NPS scheme is a wise decision.


1. Freedom of investment

Opening an NPS account online only takes 10-15 minutes, and there are no restrictions on the frequency of contribution. Investors can change the frequency of contributions to monthly, quarterly, half-yearly, or yearly. Investing amounts can also be increased or decreased if they are above the prescribed doses.

NPS lets investors choose the scheme preference, different asset allocations, and pension fund managers for tier I and II accounts. Moreover, the scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), with clearly defined investment norms, strict monitoring, and a regular performance review of fund managers by the NPS Trust.

2. NPS tax benefits for investors

NPS investments are eligible for tax deduction up to a limit of Rs 1.5 lakh under section 80CCD(1) of the Income Tax Act 1961. Subscribers can also claim an additional deduction of up to Rs 50,000 per annum under section 80CCD(1B). Additionally, corporate employees are entitled to an additional NPS tax benefit under section 80CCD(2).

Hence, in addition to building a retirement corpus, NPS is also helpful as a tax-saving investment. At the time of withdrawal, 60% of the corpus can be withdrawn in a lump sum and is entirely tax-exempt, while the remaining 40% has to be invested in an annuity scheme.

3. Option of automatic investment in NPS

NPS scheme allows individuals to invest through active-choice and auto-choice methods. Under the active choice option, individuals can actively manage their accounts and make investment decisions. They can diversify their portfolios by investing in multiple asset classes such as equities, corporate debt, government bonds, etc.

In the auto-choice mode,  professional fund managers automatically rebalance and manage investments depending on your age. As the investor’s age increases, the investor’s exposure to equities tends to decrease to get a balance among high, medium, and low-risk investments. The disclosure may be higher in equity for younger investors. The exposure may be higher in equity for younger investors.

4. Early withdrawal rules

NPS withdrawal restrictions apply to tier-I NPS accounts, and there are no such restrictions for tier-II accounts. While the NPS tier-II account has a lock-in period until retirement, you can withdraw 25% of the contributions after being in the scheme for three years. Such partial withdrawals are allowed in exceptional cases, such as medical expenses, children’s education, marriage expenses, etc. Moreover, only three partial withdrawals are allowed with a gap of five years.

Additionally, you can opt for premature withdrawal once you have finished five years as a subscriber (five years in the case of self-employed individuals). In this case, you must invest 80% of your NPS corpus in an annuity scheme if it is more than Rs 2.5 lakh.

Final words

So, is investing in a national pension scheme a smart decision? NPS is a smart decision as part of your long-term retirement saving strategy. How much you invest in NPS and how frequently it will depend on factors such as your age, income, other investments, and overall retirement goals. Supplementing your NPS investment with other assets would be best to build the required retirement corpus.

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