Here are 9 reasons why NPS can be your retirement solution

Planning for retirement is one of the important things of human life. National Pension System (NPS) is a balanced and tax efficient retirement instrument, which is also capable of offering high returns. If any person invests as small as Rs 2,000 per month since the beginning of his/her professional life, it is possible to build a corpus of Rs 1 crore at retirement. Money9 offers a 9-point discussion as to why NPS is one of the best retirement instruments which you can seriously consider.

1. Low cost

Depending on the chosen account (Tier-I or Tier II), the minimum deposit is only Rs 500 per month. Experts consider NPS is one of the world’s cheapest retirement plans.

On an average, NPS schemes tend to deliver returns to the tune of 15-16% for a 5-year term, and at least 9-10% for a 30-year term.

There is no maximum limit of monthly contribution, but ideally monthly NPS contribution should not cross 10% of the salary, said experts.

2. Tax efficiency

As an NPS subscriber, you can claim exemption of up to Rs 50,000, under section 80CCD. Secondly, additional tax-saving is there for employer contribution too under the same section.

The best part is both these benefits are beyond the Rs 1,50,000 limit of Section 80C. This makes NPS a more desired tax planning investment.

For the self-employed, 80CCD (1B) and 80C apply. Up to 20% of gross annual income can also be invested and claimed for tax exemption under section 80CCD (1). This has a cap of Rs 1,50,000. As an NPS subscriber, you can also transfer superannuation funds to NPS account without facing any tax implications.

3. Balance of the fund

NPS has two options — active and auto choice. Active choice permits investment distribution among equity, corporate bonds, government securities and alternative assets according to your choice.

You can push up to 75% of your investment into equity segment, rest would be in corporate and government bonds. This is a ‘high risk-high return’ approach.

On the other hand, in auto choice equity portion is linked with your age. As you grow older, the investment in equity segment would become smaller. It is quite conservative but still gives you good return at the age of 60.

4. Asset class

Active choice offers flexibility between asset classes and the proportion of funds to allocate to each. However, the allocation cannot exceed 75% for equity and 5% for alternative investment funds.

Each asset class has its own risk profile, for which qualified fund managers provide adequate information and guidance. The auto choice allows you to “automatically” reduce risk exposure as you get older.

A pre-defined portfolio helps you determine fund proportion per asset class. This portfolio also changes as per your age. With increase in age, the exposure to equity and corporate debt tends to decrease.

5. Easy to access

NPS is convenient for everyone. The smooth, swift, and paperless online procedure is easy to understand to everyone. An online NPS account creation takes only about 30 minutes.

After creating the account, payment of monthly contribution is as easy as paying your mobile bill. You can track your investment through app also hereafter.

6. Investment period

One can invest in NPS until the age of 60 years or till his or her retirement. There is also an option to continue the account till the age of 70 years. After the maturity 40% of the total corpus has to be kept as an annuity plan for regular income and the remaining 60% can be withdrawn.

In PPF, investors have to withdraw the entire amount. There is no annuity option in NPS.

7. Flexible amount

There is no fixed monthly contribution in NPS and a person can contribute (tier-I) any amount as per his/her choice every month subject to a minimum contribution of Rs 500. On the other hand, one can contribute a minimum of Rs 250 in tier-II NPS account.

Here also the amount can be anything above Rs 250 per month. But It is mandatory to invest minimum Rs 6,000 in a fiscal year for Tier-I or Tier-II NPS account.

8. Everybody can invest

Initially, NPS was launched for government employees but now everyone can join it including NRIs. The person should be over 18 years of age.

A person can open an NPS account up to the age of 65 years. Two types of accounts are opened under NPS – Tier-I for retirement and Tier-II a voluntary account for flexibility.

Central and state government employees have NPS account by default. Private sector employees or self-employed persons are eligible to open an NPS account.

9. High returns

As NPS is a market-linked scheme, its returns depend on the market’s performance. An investor can choose from equity, government securities, and corporate bonds to invest in. The return would be between the range of 9% and 15% depending on the asset allocation.

A conservative investment option can yield 9%, whereas an aggressive investment pattern can yield 15-16% return after the tenure.