Retirement is an essential worry for much of the workforce in India and is a reasonable one as well. To have enough saved up after giving up regular work is necessary to have a stress-free old age.

One great way to start saving up for retirement is by signing up for the National Pension Scheme(NPS). It’s a retirement scheme for the working class to have a stable income after they retire. You may also be interested in learning on Internal Auditing and Management Consultancy in Kerala

The two tiers of NPS

There are basically two ways in which contributors can start investing in NPS. Although tier 1 is pretty restrictive with the aim of creating a solid retirement corpus, tier 2 is similar to voluntary savings accounts with maximum flexibility over withdrawals and deposits.

There are a couple of things to know if you opt for Tier 1 of the National Pension Scheme.

According to Section 80CCD(1) of the Income Tax Act, salaried employees who make their own contributions of up to 10% of their salaries are eligible to claim deductions within a limit of Rs. 1.5 Lakhs.

Self-employed professionals can also avail deductions of up to to 20% of their gross income with an upper limit of Rs. 1.5 Lakhs. An additional deduction of Rs. 50,000 for tier 1 NPS contributors (both salaried and self-employed) are allowed under section 80CCD(1B).

Thus the maximum deduction available for tier 1 NPS subscribers is Rs. 2 Lakhs which is higher than both EPFs and PPFs.

Benefits of enrolling into NPS

Being one of the most well-regarded retirement savings instruments with a minimum monthly contribution, NPS has several benefits over other conventional savings methods.

Also considering the increased control that the contributor gets over where the funds are invested, NPS is significantly more advantageous over Employee Provident Funds(EPF) and Public Provident Funds(PPF) in many ways.

1.The primary benefit of choosing NPS is that you can invest almost 75% of your funds on equities which could get you improved yields over the years. It’s also mandatory that at least 25% of your savings be invested in debt instruments as well. This is to safeguard your retirement savings from any losses that you may encounter in your equity investments.

According to recent studies, NPS funds have delivered solid returns consistently over the past few years. Returns from equity schemes in just the last five years ranged from 14.5% to 15.80% and the same for debt funds have been around 10.29% to 11.90%. Returns such as these are not common to EPF or PPF.

2. Apart from higher returns over time, NPS also comes with several tax benefits for contributors. Under section 80C of the income tax act of 1961, contributions to NPS are eligible for tax deduction up to Rs. 1.5 lakhs and even an additional Rs. 50,000 under Section 80CCD(1B).

In essence, NPS contributors can get a maximum tax deduction of up to Rs. 2 lakh which is more than the deductible tax amount for EPF or PPF.

3. Investment schemes come with fund manager fees that are usually a bit invasive on the percentage of the money they require as fees. The maximum expense ratio of mutual fund schemes stands at 2.25% which is quite high compared to NPS pension fund manager fees which are capped at just 0.01%. Thus it’s safe so say that NPS is highly cost-effective. You may also be interested in learning on Internal Auditing and Management Consultancy in Kerala

Limitations of NPS funds

While NPS holds a great advantage over EPF and PPF over the equity options and improved returns, they also come with a fair amount of limitations too.

1.EPF and PPF have an exempt-exempt-exempt(EEE) treatment for annual investments up to Rs. 2.5 lakhs while NPS funds on maturity are not fully tax-exempt. Although you can withdraw 60% of the accumulated corpus in NPS tax-free when you retire, the rest of it is required to be invested to buy an annuity, which would only give you meager returns before tax.

Pre-tax yields for annuity plans stand at 3.5% to 6% at the moment, and the annuity income that the contributor receives is also taxable under their tax slab as well. ELSS schemes that were set for the same maturation period can yield even more returns than NPS and are taxed at 10% for returns that are over Rs. 1 lakh/year.

2.A major disadvantage for investors under NPS is its long lock-in period. NPS investments remain locked until the contributor reaches 60 years of age. You can withdraw a maximum of 25% of your investment before maturity, but this too can only be allowed for very specific needs like higher education or marriage of children, or specific illnesses.

The lack of control over your finances during the lock-in period is perhaps the greatest disadvantage that contributors see in NPS. Reinvestment options after maturity are also limited which makes it a bit unattractive when compared with flexible options like EPF, PPF, and ELSS.

Summing Up

No matter the type of investment you choose to secure your retirement, Parpella can help you get started and provide timely insights on investments to make your life easier. We help customers with all kinds of tax filing, business registration, and general financial advice for people who are not sure of the best way to manage their finances. Reach out to our office for even more finance solutions. Contact your Business and Company Registration Consultant in Kerala today.