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How to Plan a Happy Retirement with NPS?

Written by - Tejesh Kumar

June 30, 2020 4 minutes

Happy Retirement with NPS-01

The reality of retirement planning isn’t as dramatic as it sounds. It is, in fact, easier if you start early because you never know what befalls in the future. So where do you get started? What could you possibly do effortlessly to save for your post-retirement days and not depend on other family members? National Pension Scheme might be the answer to all these queries. Let’s find out how.

Retirement Planning with National Pension Scheme (NPS): 101

The first thing that one needs to be aware of, about NPS is that it is governed by Indian laws and hence protected by them. This is one of the most secured investment schemes in India and can be very beneficial. 

1. All you need to be eligible for investing in the National Pension Scheme is proof of citizen of India with ID and Address proof and be over 18 years of age and less than 60 years of age.

2. There are 2 types of accounts for NPS and individual may subscribe for:

    • Tier 1: It is a mandatory account for all those who opt for NPS. The Government employees have to contribute 10% of their salary (salary = basic + DA), and the government will make equal contributions as well. For others opting this scheme, the initial contribution is Rs. 500/- at the time of account opening and minimum annual contribution is Rs. 5000.
    • Tier 2: Not a compulsory account like Tier 1. You can withdraw funds at any time, and hence, it provides high liquidity. There are no contributions from the government or the employers and include no tax exemptions either. There are three critical points to make a note of The minimum amount required to open this account is Rs. 5000/-

3. You get two options which are Active-choice and auto choice. With active-choice investment option, an investor gets to mix equity, corporate debt, and government securities as per his/ her choice. However, the allocation of equity can be a maximum of 50%. Auto- choice Allocation is done based on the investor’s age.

EquityTill the age of 35, the equity portion is 50%, post which it reduces 2% yearly till it becomes 10% by the age of 55.
Corporate DebtTill the age of 35, the corporate debt is 30 %, post which it reduces 1% every year until it becomes 10% by the age of 55.
Other Options1. Aggressive life-cycle fund – begin with an equity allocation of 75%.

2. Conservative life-cycle fund – start with an equity allocation of 25%. Reduces as per the investor’s age advances.

4. Opening an NPS account is not that difficult now. It’s just a click away. You can easily invest in NPS online through the Fisdom App. We are a new-age app that makes it easy to invest in mutual funds, in a matter of minutes.

5. This is not all, NPS also has major tax benefits: Based on Union Budget 2019, NPS now qualifies to be an Exempt-Exempt-Exempt (EEE) category product. This means that NPS tax is exempted at all 3 stages. Here is how you benefit from it:

  1. Tax deductions up to 1.5 lakh per annum under Section 80CCD of the Income Tax Act.
  2. Additional tax deduction up to Rs. 50,000 under Section 80CCD(1B) in a financial year. (only Tier 1 accounts are eligible, not Tier 2)
  3. At term completion or 60 years, 60% of the amount received is free from tax, while the rest 40% has to be invested in the annuity.

So, you not only plan a financially happy retirement but also save on taxes while doing so. A lot of people need to understand that given the current scenario where the pension is almost non-existent one can use NPS to make their actual free time in life, comfortable.

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