By A citizen must pay taxes on time. This helps the governments build the infrastructure and the development the country needs as it grows.
But there are occasions when an individual would deserve a tax break, like if they are paying back a huge loan. Sometimes, the government announces tax discounts for certain things like investing in a retirement fund to ensure encourage their citizens to build a considerable corpus. This is one of the factors that make the National Pension System or NPS a favourite for many. Let us learn more about NPS and learn in detail about its tax implications and benefits.
What is NPS?
NPS, or the national pension system, is a pension system backed by the government. It is a voluntary pension scheme that has now replaced the official pension scheme for many government officials. Initially started for a limited amount of government officials, the scheme managed by the PFRDA (Pension Fund Regulatory and Development Authority) is now available for every investor in India.
The scheme allows you to invest in smaller instalments every month to slowly create a corpus that can ease your retirement finances. NPS matures when you turn 60. At maturity, you can withdraw a certain percentage of the fund to meet your financial planning, and the rest will be paid to you as a pension.
Unlike traditional pension schemes, NPS also invests your money in market-linked options such as equities or in other investment options. You have the option to choose a fund/ fund manager according to your investment horizon. You can also switch to a new fund without any fee for a limited amount of time in NPS.
There are two-tier options, too, in NPS. The first tier is the default and the mandatory tier. Your initial investment goes here. Tier 1 has a lock-in period till you turn 60 as well. At the same time, tier 2 has no such restrictions. On the other hand, tier 2 lacks many NPS benefits, including tax savings.
Tax implications and benefits of NPS
NPS gives you tax benefits both at the time of investment and at withdrawal. Your investments in NPS come under deduction under section 80C of the income tax act 1961. That means you get tax benefits for up to Rs.1.5 lakhs of investments in NPS. Further, there are additional deductions for investments up to Rs 50,000 in Tier 1 accounts under Section 80CCD. However, these benefits are not available for investments in the tier 2 account
NPS has certain tax benefits at the time of maturity as well. At maturity, you have the option to withdraw your entire corpus. But of which, only 60% of your corpus is tax-free. The remaining 40% has to be converted into an annuity and is taxed. Annuity ensures that you receive a fixed amount of money regularly for the rest of your life.
Benefits of investing in NPS
- Unlike traditional options, NPS invests your fund in equities as well. This gives your corpus an enhanced chance to grow as well. This is because equity investments tend to grow much faster than fixed-income investments. At the same time, it has an increased risk as well.
- Even if you are a risk-averse investor, there are options for you. You may choose a fund with lesser equity options here.
- A retirement fund is nothing short of necessary. It protects you and your family at a time when a regular income stops for many. NPS scheme allows you to create a corpus by investing in smaller instalments.
To take the full benefits of NPS, ensure you invest early. This gives you plenty of time to grow your fund and enables you to start with a smaller monthly contribution.
