How Small Investments in NPS Can Help in Retirement Planning

Improvement in medical aid, health and sanitation facilities has increased the life span of an average Indian, thereby enhancing the number of post-retirement years. A smart investment plan is essential in order to continue to live an independent, comfortable and stress-free life after retirement.

While there are a number of retirement investment options in the market, an attractive scheme is the National Pension System (NPS). Initially, the scheme was mandatory for government employees. However, on May 01, 2009it was made available to the private sector. NPS is a low-cost, tax-efficient, flexible and portable retirement savings plan. Some of the benefits include NPS deduction for tax of INR 1.5 lacs under section 80CCD(1), an additional tax deduction of up to INR 50,000 under section 80CCD(1B) and flexibility to choose asset allocation between equity, fixed income instruments, and government securities.

Pension calculator

Investors may use a pension plan calculator to determine the amount of investment they would have to make. One such calculator is available on the Kotak Mahindra website. This will help individuals understand the amount they would need after retirement to sustain their current standard of living.

NPS for post-retirement corpus

Investing small amounts in NPS at regular intervals helps investors to have access to a substantial corpus after retirement. Starting at an early age has dual benefits. Firstly, investors will have to invest smaller amounts to achieve their desired corpus. In addition, they can enjoy the compounding effect for accumulating moreamounts in their NPS accounts.

NPS Investment rules

Subscribers may contribute a minimum of INR 6,000 to their Tier I accounts with no maximum limit to the annual contribution. They may allow a maximum of 50% in equities and balance must be invested in debt or government securities. On maturity, investors may withdraw 60% of their accumulated sum as a lump sum and convert the balance to an annuity. The NPS tax benefit is not available for the lump sum withdrawal on maturity. Premature withdrawal up to 25% of the contribution (except employer’s contribution) is allowed after 10 yearsand may be used only for certain defined purposes like children education or purchase of a first home.

The highlights of the National Pension System are the tax savings and tax deduction benefits offered to the investors. Each investor is issued a Permanent Retirement Account Number (PRAN), upon successful registration to NPS. Investors are informed of their PRAN number status via email and SMS. Subscribers may also know their status by contacting the issuing bank.

Indian investors look for flexibility, simplicity and robust performance in investment options. The National Pension System (NPS), is one of the few investment options available today, that provides all these features with added advantages of tax saving and additional tax deduction under section 80CCD (1B) of the IT Act.