The National Pension System, also known as NPS, is a popular retirement savings scheme in India that helps you build a substantial corpus for your retirement as well as avail tax benefits on investment, returns and maturity. Since it is a market-linked savings scheme and a defined contribution pension system, the pension amount will largely depend on the contributions made by the individual as well as the returns generated on the investments over time.
The contributions that you make over time play a key role in the returns that you can expect from the pension scheme on retirement. Given below are a few key tips for additional contributions that can help enhance your NPS corpus:
Start early and contribute regularly
One of the ways to enhance your NPS corpus is to start investing as early as possible. Since NPS is a long-term investment option, you can expect better returns if you stay invested for a longer period.
Moreover, you must make contributions to NPS regularly since the pension amount completely depends on the contributions that you make as well as the returns on those contributions over time.
Use an NPS calculator
You can use the NPS calculator available online on the official website to plan your additional contributions depending on the monthly pension you would like to get based on your age, investment amount and investment horizon.
Increase NPS contributions and make regular top-ups
Another means to enhance your NPS corpus is to increase your NPS contribution and do additional regular top-ups. This implies contributing more than the minimum amount required. For instance, if you are required to contribute a minimum of Rs. 1,000 per annum to your NPS Tier 1 account but since there is no maximum contribution limit, you can try and contribute more than the minimum amount required and thus, accumulate a larger corpus and earn greater returns on your increased investment.
Make lump sum contributions
Making lump sum deposits to your NPS account is another way to enhance your NPS corpus. For instance, if you get a bonus or an inheritance, you can try and invest a chunk of it into your NPS account. This could help give a significant boost to your total pension.
Choose the right investment option
To enhance your NPS corpus, it is important to choose the right investment option, that is, either active or auto. While the active option gives you the flexibility to select the asset allocation for your investment, with the auto option, the asset allocation is done automatically on the basis of your age.
NPS subscribers have the option to change asset allocation/scheme preference up to 4 times in a financial year and Pension Fund Managers once in a financial year. It is important that you select the option that is suitable for your investment style and risk appetite and then make the additional contributions accordingly.
Plan contributions around tax benefits
Since NPS (Tier 1) is an EEE savings scheme or instrument, the contributions, returns and the final pension amount are all exempt from tax. Therefore, when you make additional contributions to your NPS account, you can claim tax benefits up to Rs. 1.5 lakh in a financial year under section 80C of the Income Tax Act, 1961.
Apart from this, you can also claim additional exclusive tax benefits on investments up to Rs. 50,000 over and above the limit of Rs. 1.5 lakh under section 80CCD (1b). Thus, planning your additional contributions up to Rs. 2 lakh in a financial year does not only help you add a significant amount to your NPS corpus but can also help you avail a deduction on income tax for the same amount.
Therefore, to maximize returns from this pension scheme, it is vital that you start early, make regular contributions in lump sum, monitor your investment and also plan your investments to avail tax benefits. This way you not only build up a substantial corpus for your retirement but also save tax on your contributions.
FAQs
Q. What is the maximum contribution that I can make to my NPS account?
There is no limit on the maximum amount that you can contribute to your NPS account.
Q. My NPS account has been frozen. What should I do?
You need to make the minimum contribution along with a penalty of Rs. 100 to unfreeze and activate your NPS account. To be on the safer side, try and make the minimum annual contribution – Rs. 1,000 in case of NPS Tier 1 accounts along with the penalty payment.
Q. I have already contributed Rs. 1.5 lakh to avail the tax benefits under section 80C. How much more should I contribute to my NPS Tier 1 account?
You can contribute Rs. 50,000 more to avail tax benefits under section 80CCD (1b).
Q. Is it better to invest monthly or annually in NPS?
It’s completely up to you whether you want to invest monthly, quarterly or annually in NPS. Moreover, there is no maximum limit on investment. The frequency of your investment can completely depend on your financial goals, retirement planning, risk tolerance and period of investment.
Q. Can I continue NPS after 60 years?
You can continue to stay invested in NPS even after reaching 60 years of age or superannuation. With NPS you have the option of deferring your exit or withdrawal from NPS up to the maximum age of 75 years.