Society keeps handing out unsolicited memos every day, whether it’s your neighbourhood uncle telling you to invest in the stock market or your friends telling you to watch that new web series that people can’t stop talking about. You may sigh, roll your eyes, or end up taking them up on their recommendations. But when it comes to financial decisions, the stakes are high, and you should fully understand what you’re getting into.

So, if you have heard people around you talk about NPS or the National Pension System, and are wondering what that is and whether you should invest in NPS, let’s take a minute to break it down. NPS is a social security initiative by the government of India that aims to secure your retirement years by helping you save for it. The National Pension System is designed in a way that offers you immense flexibility and the process to invest in NPS online or offline is also simple and seamless. But these are just a few aspects of NPS. Here are some other essential benefits of investing in NPS that prove why choosing this investment avenue could be a smart decision.

1. Aids in retirement planning

Retirement planning is essential to ensure that the golden years of your life are lived without being financially dependent on anybody. But about 77% of Indian households have either not actively planned for retirement or expect to not retire, as found by a 2017 report of a committee set up by the Reserve Bank of India (RBI) on household finance. One of the main reasons why to invest in NPS is that it is an easy way to begin contributing towards your retirement corpus. It is a pension scheme by the government, and you can start to invest in NPS at any age between 18 and 70. At the maturity age of 60 (can remain invested till age 75), you receive 60% of the proceeds while the remaining 40% is invested in an annuity scheme. This gives you access to regular income in the form of annuities in your golden years. The need to invest 40% of the National Pension System corpus in an annuity scheme is waived off if the corpus is equal to or less than Rs. 5,00,000 at the time of maturity. In that case, you can withdraw 100% of your NPS funds at maturity.

2. Offers tax benefits beyond section 80C

One of the important reasons to invest in NPS is that it is eligible for a deduction  U/s. 80CCD(1)  with overall celling of 1.5 lakh along with section 80C of the Income Tax Act, 1961. But the tax benefits of investing in NPS don’t end there. You can also claim an additional deduction of Rs. 50,000 under section 80CCD(1B) for NPS contributions. If your employer contributes to your National Pension System account, you can claim a further deduction equal to 10% of your salary (or 14% of your salary if you’re a central government employee) under section 80CCD(2). Thus, the scope of saving on income tax is high because you can claim a deduction of above Rs. 2 lakh with NPS investment depending on your income and contribution.

3. Provides equity exposure and hedges risk

The money that you put in your National Pension System account is invested primarily in four different asset classes – equity, government securities, corporate debt, and alternative investment funds. When you invest in NPS, you have option of choosing the active allocation mode. This option gives you the flexibility in choosing what proportion of your investment you want to invest in which asset class. For instance, you can choose to invest up to 70% of your NPS funds in equities up to the age of 50. Such kind of equity exposure could help earn better returns and diversification into the other three asset classes tends to help hedge market risk.

4. Allows for automatic risk reduction

One of the other benefits of investing in NPS is that you can opt for automatic risk reduction by choosing the auto asset allocation choice. Here, your role as an investor is passive and your asset allocation will keep adjusting automatically as you cross certain ages to lower the investment risk as you near your retirement age. So, while the asset allocation may start off by being equity-heavy, eventually a majority of your National Pension System funds will be moved out of the stock market and into comparatively safer investments like debt instruments.

5. Acts as a low-commitment investment

One of the benefits of investing in NPS is that you do not need to invest large amounts regularly to keep your account active. The only requirement is to invest at least Rs. 1,000 per financial year for your NPS tier I account and Rs. 250 for your NPS tier II account. Hence, when you invest in NPS, it doesn’t become a burdening obligatory investment scheme that requires a certain amount of funds to be contributed regularly. Depending on your investment strategy, changing income, etc., you can alter the amount you choose to invest in the National Pension System yearly.

6. Allows for partial withdrawals

While NPS has a lock-in period until retirement, there are certain reasons for which the National Pension System allows for partial withdrawals. These reasons include treatment of critical illnesses, funding children’s higher education or wedding, and for purchasing or renovating a residential house. To be eligible for a partial withdrawal, you need to have been an NPS account subscriber for at least three years. The amount of the partial withdrawal cannot exceed 25% of your NPS contributions and you can make such a withdrawal only thrice during your investment tenure. This is one of the most helpful benefits of investing in NPS because it can aid you in times of financial emergency pertaining to the mentioned reasons. So, in this way, NPS does offer partial liquidity in times of need.

7. Offers affordability and simplicity

The charges involved in NPS investment, such as the investment management charge, are low as compared to other investments, and this is also one of the reasons to invest in NPS. Depending on the amount managed, the management charge is between 0.03% and 0.09%. The National Pension System is also simple to register to and manage. You can open an account and invest in NPS online through the official eNPS website or visit your nearest Point of Presence Service Provider (POP-SP).

Now that you know all the reasons why to invest in NPS, you may have questions regarding how to go about the process, how much you should invest in NPS, and more. For having better clarity, it’s best to consult a financial expert. They can not only help you with investing in the National Pension System but also map out your overall retirement planning and tax saving strategies. A professional will be able to guide you on a comprehensive investment plan for all your financial goals moving forward.

Interested in exploring NPS? Click here.

*Tax benefit is for indicative purpose only. Tax laws are subject to amendment from time to time. Tax benefit is calculated assuming that the net total income is below Rs.50 lakhs and is chargeable to tax at 31.20%.The above information is for general understanding and reference. This is not legal or tax advice and users are advised to consult their tax advisors before making any decision or taking any action.

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