National Pension System (NPS) is a retirement product that provides financial stability along with wealth creation in the golden years. Individuals can invest in NPS to secure their future. Subscriber can invest as per his choice under NPS under equity and debt. Moreover, NPS is an Exempt-Exempt-Exempt (EEE) instrument, where one will get income tax exemption at the time of contribution, accumulation and exit from NPS.
Reema Sharma of Zee Media in Q&A with Amit Sinha, Group Head – Social Security & Welfare, Protein eGov Technologies Limited
Q1. How much investment is required in National Pension System to get Rs 2 lakh monthly pension?
NPS provides long term savings perspective to plan for retirement effectively through safe and regulated returns. Investing in NPS at a young age will ensure higher monthly income after retirement through compounding. For example, if a person is 20 years old and is depositing around Rs 8,500 per month for 40 years, he would end up accumulating around Rs 4 crore at an internal rate of return (IRR) of 9%. If the individual chooses to annuitize the entire corpus, he will get a monthly pension of Rs 2 lakh (provided the entire corpus is annuitised).
Q2. How is NPS better than other savings instruments?
NPS is better than other financial products because of the special benefits it offers, which are listed below:
1. Flexibility: Till now, an NPS investor could choose any one of the ten available Pension Fund Managers (PFMs) to manage his NPS investments across asset classes, with an option to change the PFM once in a financial year. While this process has worked well over the years and continues to do so, in order to provide greater flexibility to the investor, the option to choose different PFMs for different asset classes has been made available to investors. Moreover, NPS subscribers have complete control over their investments as they can decide their own investment pattern. Also, subscribers can change their investment choice up to four times in a year.
2. Stability: NPS investment can be invested in both equity and debt. Accordingly, it allows the individual to earn market linked returns with consistency.
3. Portable: NPS provides a hassle-free facility for an individual subscriber to move across sectors and locations.
4. Retirement + Investment Account: Account opening with NPS gives a Permanent Retirement Account Number (PRAN), which is a unique number that remains with the subscriber throughout his life. The scheme is structured into two types of accounts:
• Tier-I Account: This is a non-withdrawable retirement account in which regular contributions made by the subscriber are deposited and invested. This will help in meeting long term goals.
• Tier-II Account: This voluntary withdrawable account acts as an investment account. This will help in meeting short term goals.
5. Tax Benefits: Investors can avail tax benefits on investments up to Rs 2 lakh. Tax benefits can be availed under section 80C, 80CCD(1B) and 80CCD(2).
6. Lowest Charges: NPS is the lowest cost investment product at an expense ratio of barely 17 basis points (0.17%). NPS is the most suitable product in the Indian context for retirement planning. The sooner one starts, the more the investment will have a compounding effect, resulting in significant wealth creation.
7. Strictly Regulated: NPS is regulated by the pension regulator, Pension Fund Regulatory and Development Authority (PFRDA), which ensures transparent investment methodology, regular monitoring and performance review of fund managers.
8. Hassle Free Digital Travel: Onboarding can be done digitally in a paperless manner, and transactions can be done online, making it hassle-free.
Q3. Can you highlight the benefits of NPS amid the new income tax regime announced by Finance Minister Nirmala Sitharaman in this year’s budget?
The new tax regime offers lower tax rates as there are no exemptions and deductions; However, as income increases, more tax is paid. On the other hand, if one wants to do financial planning for wealth creation through multiple tax-saving instruments, the old tax regime helps in reducing the tax outgo.
Though no tax exemption has been provided in the new tax regime, yet one can avail tax exemption on employer’s contribution under 80CCD(2). While investing in the National Pension System (NPS) Tier I account, individuals should carefully consider their tax liabilities and take advantage of section 80CCD(2), which allows deduction for employer’s contribution to the NPS account . The maximum deduction allowed varies for private sector and government employees and any excess contribution over Rs. 7.5 lakh per annum will be taxable.
Irrespective of any tax regime chosen, an individual should invest in NPS for long term wealth creation.