The National Pension System (NPS) is a retirement product that provides financial stability in the golden years, coupled with wealth creation. Individuals can invest in NPS to protect their future. The subscriber can invest as per his/her choice under NPS under Equity and Debt. Further, the NPS is an Exempt-Exempt-Exempt (EEE) instrument, where one shall receive income tax exemption at the time of contribution, accumulation and exit from NPS.
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Reema Sharma of Zee Media in a Q&A with Amit Sinha, Group Head – Social Security and Welfare, Protean eGov Technologies Limited
Q1. How much investment in National Pension System is required to get Rs 2 lakh monthly pension?
NPS offers a long-term saving perspective for effectively planning retirement through safe and regulated returns. Investing in NPS at an early age shall ensure a more considerable monthly income after retirement, which happens through compounding. For example,if an individual is 20 years old and is depositing around Rs 8,500 per month for 40 years, he shall accumulate around Rs 4 cr at a 9% Internal Rate of Return (IRR). If the individual opts to annuitize the entire corpus, he/she shall get a monthly pension of Rs 2 lakhs (provided the entire corpus is annuitized).
Q2. How is NPS better than other savings instruments?
NPS edges over other financial products due to the exclusive benefits it offers, which are listed below:
1. Flexibility: Until now, an NPS investor could choose any one amongst the ten available Pension Fund Managers (PFMs) to manage their NPS investments across the asset classes, with an option to change the PFM once in a Financial Year. Though this process has worked well through the years and continues to do so,to provide greater flexibility to the investor, the option of choosing different PFMs for different asset classes has been made available for the investors. Moreover, NPS subscribers have complete control over their investment as they can decide on their investment pattern. Also, subscribers can also change their investment choice four times a year.
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2. Stability: NPS investments can be invested in both equity and debt. Accordingly, it allows the individual to earn market-linked returns with stability.
3. Portable: NPS provides a glitch-free facility to an individual subscriber to shift across sectors and locations.
4. Retirement + Investment account: Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), a unique number that remains with the subscriber throughout his lifetime. The scheme is structured into two types of accounts:
• Tier-I Account: This is the non-withdrawable retirement account into which the regular contributions made by the subscriber are credited and invested. It shall help in meeting long-term goals.
• Tier-II Account: This voluntary withdrawable account serves as the Investment Account. It shall help in fulfilling shortterm goals.
5. Tax benefits: Investors can avail of tax benefits on investments upto Rs 2 Lakh. The tax benefits can be availed under Sections 80C, 80CCD(1B) and 80CCD(2).
6. Lowest charges: NPS is the lowest cost investment product at an expense ratio of hardly 17 basis points (0.17%). NPS is the best-suited product in the Indian context for retirement planning. The sooner one begins, the more compounding effect of the investment will happen, resulting in significant wealth creation.
7. Tightly regulated: NPS is regulated by the Pension Regulator, Pension Fund Regulatory and Development Authority (PFRDA), which ensures transparent investment methodology, regular monitoring, and performance review of fund managers.
8. Hassle-free digital journey: Onboarding can be done digitally in a paperless manner,and transactions can be carried out online, making it hassle-free.
Q3. Can you highlight the benefits of NPS amidst the new Income tax regime announced by FM Nirmala Sitharaman in the Budget this year?
The New Tax Regime offers lower tax rates as there are no exemptions and deductions; however, as the income increases, more tax is paid. On the other hand, if one wishes to have a financial plan for wealth creation through multiple tax-saving instruments, the Old Tax Regime helps lower tax outgo.
Though the new tax regime does not provide any tax exemptions, one can still avail of tax exemption on the employer’s contribution under 80 CCD(2). When investing in the National Pension System (NPS) Tier I account, individuals should consider their tax liabilities carefully and take advantage of Section 80CCD (2), which allows for a deduction for the employer’s contribution to the NPS account. The maximum deduction allowed varies for the private sector and government employees and any excess contributions over Rs. 7.5 lakh per year will be taxable.
Irrespective of the tax regime being chosen, an individual should invest in NPS for long-term wealth creation.
