Why NPS is a Smart Investment Choice: A Comprehensive Assessment

Why Is NPS a Good Investment Option for You- A Comprehensive Assessment

In today’s uncertain economic climate, securing one’s financial future is more crucial than ever. Among the myriad of investment options available, the National Pension Scheme (NPS) stands out as a particularly smart choice for those looking to ensure a stable income in their retirement years. This blog delves into the array of benefits offered by the NPS, making a compelling case for why it’s a wise investment avenue.

Introduction to the National Pension Scheme

Launched with the intention of providing financial security to all Indian citizens in their retirement, the National Pension Scheme is a government-backed initiative. It encourages individuals to invest in a pension account at regular intervals. Upon reaching retirement, investors can withdraw a portion of the corpus as a lump sum, with the remaining balance used to purchase an annuity providing a steady income through the retirement years.

Why invest in NPS?

Choice of Investments

NPS also offers the flexibility to choose between two investment options – Active Choice and Auto Choicе. In  NPS Activе Choicе, thе subscriber can dеcidе thе allocation of funds across assеt classеs (Equity, Corporate Debt, Government Bonds, and Alternative Investment Funds) based on his risk appеtitе. On the other hand, in NPS Auto Choicе, thе funds are automatically allocated based on thе agе of thе subscribеr, with a highеr еquity allocation for youngеr individuals and a gradual shift towards safеr instruments as thе subscribеr nеars retirement agе.

Furthеr, on maturity, thе subscribеr can withdraw up to 60% of thе accumulatеd corpus as a lump sum, while the remaining 40% is mandatorily usеd to purchasе an annuity. This annuity providеs rеgular incomе during thе subscribеr’s retirement years.

01. Active Choice:

The NPS Active Choice allows subscribers to take control of their investment strategy. You can decide the exact percentage of funds to be allocated among different asset classes such as equity (E), corporate bonds (C), and government securities (G). It’s tailored for investors who have a good understanding of asset allocation and are comfortable managing their investments based on market conditions.

Pros:

Controlled Allocation: You can determine your own asset allocation, adjusting it as per market conditions and personal risk tolerance.

Potential for Comparatively Higher Returns: Higher exposure to equities can potentially offer comparatively higher returns, especially beneficial for young investors with a longer time horizon.

Equity (E)

Carries the highest level of risk but also has the potential for comparatively higher returns over the long term.

Corporate Debt (C)

Involves investment in fixed income securities issued by companies

Carries a lower risk compared to equity and offers relatively stable returns.

Government Securities (G)

Includes investments in government securities

Considered to have the lowest risk among other asset classes

Typically offers lower returns compared to equity and corporate debt.

02. Auto Choice

There are three Life Cycles Fund Options for Auto Choice based on risk tolerance:

Aggressive

Designed for investors who are willing to take higher risks in search of potentially higher returns.

Has a higher allocation to equity in the earlier years and gradually shifts towards more conservative investments as the investor approaches retirement age.

Moderate

Strikes a balance between risk and return.

Follows a more moderate allocation to equity and gradually shifts towards more conservative investments as the investor approaches retirement age.

Conservative

Designed for investors with lower risk tolerance. Has a lower allocation to equity and focuses more on stable, income-generating investments.

Regular Pension after Retirement

Tax Benefits Available to Individual Investors

NPS subscribers can claim tax benefits under Sec 80 CCD (1) up to Rs. 1.5 lac under Sec 80 CCE.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)

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 Benefits under the Corporate Sector:

01. Corporate Subscribers

Subscribers in the Corporate Sector are entitled to additional tax benefits under Section 80CCD (2) of Income Tax Act. Employer’s NPS contribution (for the benefit of employee) up to 14% of salary (Basic + DA), is deductible from taxable income, up to 7.5 Lakh.

02. Corporates

Employer’s Contribution for employees towards NPS up to 14% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

How to make the Investment to avail the Tax Benefit:

If you are an existing Subscriber, you can approach any POP-SP or alternatively you can visit eNPS website to make additional contributions in your Tier I account.
Please note: Tax benefits are applicable for investments in Tier I account only.

What will be the investment proof to avail the tax benefit under NPS?

The Transaction Statement may be submitted by the Subscriber as evidence of their investment. As an alternative, subscribers from “All Citizens of India” can log into their NPS accounts and download the receipt for any voluntary contributions made in Tier I accounts for the necessary financial year. You can download it by selecting the “Statement of Voluntary Contribution under National Pension System (NPS)” submenu from the “View” main menu when logging into your NPS account.

NPS vs. Public Provident Fund (PPF):

While PPF offers a secure, government-guaranteed return, its ability to beat inflation over the long term is limited. NPS, with its market-linked returns and the option to invest in equities, provides an opportunity for higher, inflation-beating returns. This makes NPS a potentially more lucrative option for those willing to take on a bit more risk for the possibility of greater long-term gains.

Conclusion:

When comparing the National Pension System (NPS) with other investment products like the Public Provident Fund (PPF), it’s clear that each option serves different purposes and caters to distinct investor profiles.

Ultimately, the choice between NPS and these other products depends on your financial goals, risk tolerance, and investment horizon. However, if you’re looking for potentially higher returns and are comfortable with market-linked risks, NPS could be a superior choice.

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