The Ticking clock, the looming retirement, the whispers of “what if….?” These are the worries we all face at some point. But what if we told you there is a powerful tool in your arsenal, waiting to be wielded? Enter the National Pension scheme (NPS)-your gateway to a financially secure and fulfilling post-retirement life.
NPS is ideal for self-employed professionals like lawyers, doctors, chartered accountants, entrepreneurs, architects, journalists, chefs, freelancers wherein no employer is attached. The National Pension Scheme (NPS) is a Central Government scheme in which any individual citizen (either salaried or non-salaried) of India (both resident and non-resident) between the ages of 18 and 70 can participate and set aside an amount on a regular basis.
NPS is a lifesaver as it is reliable, flexible, and easy to navigate. It is a promising investment avenue for retirement. With so many benefits and a regulator involved, the scheme may be a good approach for low-risk appetite investors.
Imagine starting small, say Rs.5,000 a month, at the age of 25. Let that money work its magic over 40 years, growing steadily through the power of compounding. With an average annual return of 8%, that seemingly modest sum could transform into a whopping approx. Rs.1.75 crore by the time you hit 65!
Yes, NPS offers impressive returns, but its benefits extend beyond mere numbers. It offers – Tax Savings, Portability, Choice and flexibility, Transparency and Security.
What type of accounts NPS offers to its subscribers?
Tier I:
The primary account, which is a pension account, which has restrictions on withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I account.
Tier II:
In order to introduce some liquidity to the scheme, the PFRDA allows for a Tier II account where subscribers with pre-existing Tier I accounts can deposit and withdraw money as and when they want. Tier II is an investment account, similar to a mutual fund in characteristics, but offers no exit load, no commissions, and good returns.
Exit Option under Tier I:
On attaining age of 60 years:
– If total corpus is equal or less than Rs.5.00 Lacs, then entire corpus can be withdrawn.
– If total corpus is more than Rs.5.00 Lacs then, Minimum 40% of the corpus needs to be invested in Annuity Scheme(Taxable as per Slab) and 60% of the corpus can be commuted/withdrawn in lump sum/ staggered anytime up to age of 75 years (Tax free)
Before 60 years of age (after completion of 5 years):
– 20% of the corpus can be withdrawn in lump sum
– 80% of the corpus will be invested in a ‘Annuity Scheme’
– If total corpus is equal or less than Rs.2.50 Lacs, then entire corpus can be withdrawn.
Withdrawal Option under Tier I:
– A partial withdrawal of accumulated pension wealth, not exceeding 25% of the employee contributions, after a lock in period of 3 years.
– Allowed to withdraw only a maximum of three (3) times during the entire tenure subject to conditions prescribed by the Regulator.
Tax benefits under NPS:
Tax Benefit available to Individual:
– Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) within the overall ceiling of Rs.1.5 lacs
– An additional deduction for investment up to Rs.50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs.1.5 lakh available under section 80C of Income Tax Act. 1961.
Tax Benefit available to Corporates:
– Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act.
– Employer’s NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, up-to 7.5 Lakh.
Let us understand from below example, how Withdrawal/Exit Option will work along with its taxability:-
Example 1: Part Withdrawals under Tier I
Meet Riya: A 45-year-old teacher with an NPS corpus of Rs.7 lakhs. Unfortunately, her son requires urgent medical treatment, estimated to cost Rs.5 lakhs.
Withdrawal Option: Riya can opt for a partial withdrawal of 25% of her own contributions, excluding employer contributions (if any). In this case, she can withdraw 25% of Rs.7 lakhs, which is Rs.1.75 lakhs.
Tax Implications: Entire 25% Partial withdrawal i.e. 1.75 lakhs are tax-free.
Benefits-Riya can access immediate funds for her son’s treatment while retaining a significant portion of her retirement corpus.
Example 2: Exit Option on attaining age of 60 years:
Meet Rajeev: A 62-year-old businessperson with an NPS corpus of Rs.25 lakhs. He wishes to retire and enjoy a regular monthly income.
Exit Option: Rajeev can choose to utilize 40% of his corpus to purchase an annuity, securing a guaranteed monthly pension for life. The remaining 60% can be withdrawn as a lump sum.
Annuity purchase amount: 40% of Rs.25 lakhs = Rs.10 lakhs
Lump sum withdrawal: 60% of Rs.25 lakhs = Rs.15 lakhs
Tax Implications: The 40% used for annuity purchase is taxable as per Rajeev’s income slab. The Rs.15 lakhs lump sum withdrawal is tax-free.
How your contributions are invested?
The contributions under NPS-Swavalamban are invested in a single scheme consisting of Equity, Corporate Bonds and Government Securities in terms of guidelines prescribed by GOI, Ministry of Finance.
Within the available asset classes, NPS subscribers can opt for active or auto choice for asset allocation. In the active choice, the subscriber decides how much money gets invested in each asset class.
What is Active Choice in NPS?
– This choice is for the NPS subscribers who wish to decide their asset mix on their own.
– Under this option, subscribers have the option to choose the ratio in which their contributions will be invested among various asset classes. That is, you get a say in your asset mix.
– However, there are limitations even within this choice, as the maximum permitted allocation to equities is restricted to 75%.
What is Auto choice in NPS?
– The NPS Auto Choice option is for passive investors who seek to let an automatic allocation decide the proportion of money spread across the available asset classes.
– This allocation adopts a life-cycle-based approach, starts with an equity-heavy portfolio during the subscriber’s younger age, and systematically reduces the equity exposure as the subscriber approaches retirement.
– A life-cycle-based approach optimizes not only the returns but also cushions you from market volatility as you approach maturity.
– Under the auto choice, the investments are made in a life-cycle fund with three life-cycle funds (LC) to choose from:
a) Aggressive Life Cycle Fund:As the name suggests, it takes an aggressive approach to invest where maximum equity allocation can go up to 75%.
b) Moderate Life Cycle Fund:It is the default option, which caps the equity exposure to a maximum of 50%.
c) Conservative Life Cycle Fund: In this option, maximum equity allocation is capped at 25%.
Conclusion: – Retirement should not be a scary uncertainty, but a time of well-deserved freedom and joy. NPS puts the power in your hands. So, ditch the anxieties, embrace the future, and take control of your golden years. Open an NPS account today and watch your retirement dreams take flight.
We at RichVik Wealth, enable NPS investments for our clients to ensure their retirement is stress free.
To understand more on the topic as well as to start investments please feel free to contact us:
Phone: +91-9324609115
E-mail: team@richvikwealth.in
The article is co-authored by Ms. Diksha Parab and Mr. Mayur Solanki from Team RichVik.