Recently, the National Pension Scheme (NPS) completed 15 years of it existence. Launched in 2004, the National Pension System (NPS) serves as a robust investment avenue for individuals aiming to build a substantial retirement fund, complemented by the prospect of receiving a pension thereafter. It not only facilitates financial independence in your post-retirement years but also operates as an efficient mechanism for income tax savings. It was initially introduced for government employees and later extended to all Indian citizens, including self-employed professionals and those in the unorganized sector, on a voluntary basis starting from May 1, 2009.
NPS serves as a cost-effective retirement savings tool, providing financial support during your golden years when the regular income flow ceases. Consistent investments in NPS now can accumulate a substantial amount for your retirement.
Contributions made towards the National Pension Scheme (NPS) qualify for tax deductions under Section 80C, up to a maximum amount of Rs 1.5 lakh. Additionally, there is an extra tax deduction of Rs 50,000 available under Section 80 CCD (1B).
If you have a corporate NPS, 10% of the basic salary contributed by your employer to the NPS is eligible for deduction under Section 80CCD (2).
The Pension Fund Regulatory and Development Authority (PFRDA) has simplified the process of opening an NPS account, enabling individuals to do so online within minutes, provided they have the necessary documents. Additionally, the Finance Ministry has implemented tax benefits on contributions, including exclusive tax deductions for NPS investments and making 60% of the maturity corpus tax-free.
However, experts feel NPS is more than just a retirement fund.
The NPS offers everything that one looks for in a retirement savings product. It is a long-term investment with very low costs and a low-risk profile,” says Rahul Bhagat, CEO of DSP Pension Fund.
NPS: Structured plan for wealth accumulation
Speaking about investment and NPS, Bhagat said: “NPS is much more than just a tax-saving tool. While its tax benefits are certainly advantageous, NPS offers a comprehensive retirement planning solution. Through NPS, individuals can invest in a diversified portfolio comprising of equity, corporate bonds, and government securities, thereby potentially earning higher returns compared to traditional fixed-income instruments.”
He added: “Moreover, NPS offers flexibility in terms of contribution amounts and investment choices, empowering individuals to tailor their retirement savings strategy according to their risk appetite and financial goals. Beyond tax savings, NPS serves as a prudent long-term investment avenue for securing one’s financial future.”
NPS: Cheapest product in its range
Bhagat explained that the pension scheme is the cheapest product available in the Indian market at present. He said that investors can invest a mere Rs 30-90 per lakh annually, which is on par with ETFs offered by mutual funds and significantly lower than the 2-2.5% charged by actively managed equity funds.
NPS: Effective investment strategy
Bhagat said crafting an effective investment strategy for NPS entails a blend of prudence and foresight.
“Firstly, it’s crucial to determine one’s risk tolerance and investment horizon. Younger individuals with a longer time horizon may opt for a higher allocation towards equities within their NPS portfolio to potentially harness the benefits of long-term market growth. As individuals approach retirement age, gradually shifting towards more conservative asset classes like fixed-income instruments can help mitigate risk and preserve capital,” Bhagat said.
“Additionally, periodic portfolio rebalancing ensures alignment with evolving financial objectives and market conditions. Regular review of investment performance and adjustments as necessary are integral parts of a sound NPS investment strategy. Ultimately, the goal is to optimize returns while maintaining a balanced risk profile tailored to individual needs,” he added.
NPS: More choices for investors
In November 2023, the regulations of the PFRDA underwent a revision, wherein investors were allowed to distribute their investments among three different pension funds. Those participating in the NPS now have a selection of 11 pension fund managers to choose from. Additionally, they have the opportunity to switch their pension fund manager annually. Previously, NPS participants were restricted to investing in the offerings of a singular pension fund manager.
NPS: Tax benefits
The National Pension System (NPS) is one of the schemes that can avail exemptions under both tax regimes. Under the old tax regime, NPS offers tax benefits under three sections of the Income Tax Act, 1961. Under the new tax regime, a deduction under Section 80CCD (2) of the Income Tax Act by investing in NPS can be availed. This deduction from gross total income can be claimed if the employer contributes to the NPS account on behalf of the employee.
Explaining the rationale to choose the suitable tax regime, Bhagat said: “The decision to opt for the old income tax regime or the new regime depends on various factors including individual tax liabilities, financial goals, and personal preferences. While the old regime allows for additional tax deductions, including contributions to NPS, it’s essential to evaluate whether the benefits outweigh the tax savings offered by the new regime. Under the new tax regime, individuals enjoy lower tax rates but end up forfeiting certain deductions and exemptions, including those related to NPS contributions. Therefore, individuals should conduct a comprehensive analysis considering their overall financial situation, long-term investment objectives, and tax implications before deciding whether to stick to the old regime to maximise NPS benefits or transition to the new regime for a simplified tax structure and potentially lower tax liabilities.”