In 2020, India was rated 34th out of 39 pension systems in terms of social security coverage. Despite progress, there is still a long road ahead in terms of increasing coverage under private pension arrangements and enhancing the regulatory framework to secure the financial future of more and more workers in the country.

We often emphasize the importance of having a solid financial plan to help reach life goals. A key component of this plan is tax planning. By taking advantage of available tax deductions and exemptions, individuals can not only fulfil their obligations as taxpayers but also lower their overall tax liability. However, many individuals neglect tax planning until the last minute, leading to rushed and ineffective decisions. This is why tax planning should be a central part of one’s financial plan, especially for long-term investors planning their retirement corpus.

Retirement planning is a crucial exercise that often gets neglected, especially by those in their 20s and early 30s. Additionally, the amount of taxes they must pay due to this neglect limits their ability to save in the long run. However, it is essential to note that retirement planning should start as early as possible, as it can significantly impact the retirement corpus.

The National Pension System (NPS) is an excellent investment avenue for retirement planning that individuals can consider, it is a low-cost pension plan offered by the Indian government. NPS is open to Indian citizens between the ages of 18 and 70 and employees in the public, private, and unorganized sectors.

What is NPS?
The National Pension System (NPS) is a government-sponsored pension scheme that was launched in 2004. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and aims to provide financial security to individuals after retirement. NPS is open to all Indian citizens between the ages of 18 and 65, including NRIs (Non-Resident Indians).

How does NPS work?
NPS is a defined contribution-based pension scheme, which means that the pension amount is determined by the contributions made by the subscriber and the investment returns generated by the scheme. Subscribers can make regular contributions towards their NPS account, which is invested in various asset classes such as equity, corporate bonds, and government securities, depending on the subscriber’s risk profile. The accumulated corpus is then used to provide a regular income to the subscriber after retirement.

Benefits of NPS:

Tax Benefits: NPS offers tax benefits to subscribers under Section 80C and Section 80CCE of the Income Tax Act. Subscribers can claim a deduction of up to Rs. 1.5 lakh for their contribution towards NPS under Section 80C. Additionally, subscribers can claim an additional deduction of up to Rs. 50,000 for their contribution towards NPS under Section 80CCD(1B).

Flexibility: NPS allows subscribers to choose the amount and frequency of contributions based on their financial goals and risk appetite. Subscribers can also choose their investment option, ranging from a conservative approach to an aggressive one.

Low Cost: NPS has one of the lowest fund management charges among pension schemes in India. This means that subscribers can maximize their returns, as a significant portion of their contribution goes towards accumulating their retirement corpus. NPS has been rated as the most cost-effective pension scheme, with an average expense ratio of just 0.01%. This, compared to the average expense ratio of 1.5% in mutual funds, makes NPS an attractive investment option for the long term.

Drawbacks of NPS:

Limited Withdrawals: NPS has a mandatory lock-in period until the subscriber reaches the age of 60 years. This means that subscribers cannot withdraw their funds before the age of 60 years, except in cases of specific circumstances such as critical illness or death.

Annuity Rates: NPS subscribers are required to purchase an annuity plan from an insurance company to receive a regular pension after retirement. The annuity rates offered by insurance companies may vary, which could affect the pension amount received by the subscriber.

Which type of investor is NPS beneficial for?

NPS is beneficial for all individuals who want to plan for their retirement and create a corpus to provide financial security after retirement. NPS is particularly useful for individuals who do not have access to a government-sponsored social security system or who wish to supplement their existing retirement corpus. NPS also benefits those who want to maximize their tax savings, as it offers tax benefits under Section 80C and Section 80CCD(1B) of the Income Tax Act.

In conclusion, NPS is an excellent investment avenue for retirement planning that individuals should consider. With its tax benefits, flexibility, and low cost, NPS can help individuals build a corpus to provide financial security after retirement. However, it is essential to note the drawbacks of NPS, such as limited withdrawals and annuity rates, before making an investment decision.