National Pension System or NPS is a retirement savings scheme that helps you save for your retirement by making contributions during your employment years. You can start contributing to your NPS account as early as 18 years of age and continue up to the age of 70 years. NPS accounts can be opened with investments as low as Rs. 500 (Tier 1) and Rs. 1,000 (Tier 2). They not only help you save up for your retirement by offering lump sum returns on maturity along with periodic annuity payments but also help you save tax during your employment years.
Young investors generally have a higher risk appetite so they tend to invest in high-risk options such as stocks, futures and options, etc. With time, the risk appetite reduces making them go for a more stable investment option. NPS is one such product that offers you the flexibility to invest in high-risk options such as equity and also has some funds invested in safer options such as government bonds.
The investor gets complete flexibility to choose from the type of investment he/she wants to invest in. At the same time, NPS helps understand the benefits of having a diversified portfolio for a safer future.
Read the complete article to find out all about how NPS works and how starting early could help you build up a substantial corpus and have a secure retirement:
Early start for bigger corpus
Investment in NPS, when started at an early stage, can help grow the corpus over the long period of service. If invested and operated actively, people having a decent risk appetite can invest more in equity and end up generating a bigger corpus at the time of retirement.
Starting early with your NPS contributions also helps you inculcate a habit of disciplined savings during your working years, helping you set aside a pension fund for your future. It also helps you make the most of your savings since returns are generated on the contributions that you make over a period of time.
Systemized savings and diverse investment options
If you start early, you can choose and experiment between the diverse investment options that NPS offers. People who start early and have a big risk appetite can start off with a higher contribution towards equity and then switch to a balanced approach after the initial push and eventually move on to a safer approach in later years when the corpus is big enough.
Ideally, you can choose and experiment between the two different asset classes – active or auto up to 4 times in a financial year and between the 10 different Pension Fund Managers (PFMs) once every financial year.
If you chose the active option, you could, say for instance, decide if you wanted to take a little extra risk and invest the maximum on equity. There would be high chances that you get a healthy return from it but the risk of losses are equally there.
You can also play safe with the auto option where funds are automatically allocated across different asset classes according to a predefined matrix and rebalanced every year as per your age. This may not bring similar results if you start investing really late or provide limited exposure to equity products.
Read more on How NPS Works: Understanding the Contribution and Investment Process
Lock-in period and mandatory annuity investment
NPS has a comparatively longer lock-in period and difficult exits (premature withdrawals) that encourages long-term savings. This implies that the earlier you start, the longer you have to stay invested in the scheme which eventually results in building up a substantial corpus over time.
Starting at a young age not only ensures a bigger corpus but also a steady post-retirement income via mandatory annuity investment on maturity. The earlier you start investing, the more would be your contribution to annuity which would result in higher periodic annuity payments.
Family protection
Investing in the NPS scheme not only helps build up a substantial corpus for retirement, but also offers a pension to the family (spouse) even after the demise of the beneficiary. In case of an unfortunate demise of the beneficiary while in service (below 60 years of age), the corpus is provided to the dependent family members (spouse, mother or father) or legal heirs.
Even though the Annuity Service Provider (ASP) has to be chosen at the time of superannuation, one should understand what kind of annuity they want from the five available annuity options.
Tax benefits
NPS allows investors to save on taxes from the very beginning. One can save up to Rs. 1.5 Lakh every year (10% of basic + DA for salaried or 20% of gross income for self-employed under Section 80 CCD (1)) under Section 80 CCE.
One can save an additional Rs. 50,000 under Section 80 CCD (1B) over and above the ceiling value of Rs. 1.5 Lakh under Section 80 CCE.
On maturity, 60% of the lump-sum amount withdrawn is completely tax-free making it a lucrative investment option. One also gets tax exemption while purchasing an annuity at the time of superannuation.
Read more on NPS Tax Benefits
Therefore, to ensure a smooth and stress-free retirement and substantial amount of money to take care of your post retirement needs, it is advisable to start contributing to your NPS account early on in your career. Besides helping you build up a substantial corpus, it will also help you reap the tax benefits on your investments every year.
FAQs
Q. Can NRIs contribute to NPS?
Ans. Yes, NRIs aged between 18 and 60 years can open an NPS account.
Q. What is the minimum contribution that I need to make to my NPS Tier 1 account?
Ans. The minimum annual contribution that you need to make to your NPS Tier 1 account is Rs. 1,000.
Q. I am 25 years old and a self-employed businessman. Can I contribute to NPS?
Ans. Yes, salaried as well as self-employed individual Indian residents aged between 18 and 70 years can contribute to NPS. You can contribute up to 20% of your gross income up to a maximum of Rs. 1.5 Lakh under Section 80 CCD (1) and another Rs. 50,000 under Section 80 CCE.
Q. When can I withdraw my NPS amount completely?
Ans. You can withdraw a maximum of up to 60% of your accumulated NPS corpus after your retirement. The remaining 40% needs to be mandatorily invested in annuity.
Q. I already have an EPF and a PPF account. Can I still open an NPS account?
Ans. Yes, you can have an NPS account irrespective of whether you have any other Provident Fund or not.