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Why you should consider NPS investments this fiscal year?

It’s the new financial year—the right time to plan your investments for the entire fiscal. And this includes tax planning too.

There are two factors to keep in mind: saving taxes and building a large corpus of wealth to meet various goals. More specifically, it can come handy during retirement.

In India, the National Pension System (NPS) can be helpful in this regard. NPS is an important social security benefit for salaried employees. It allows you to have a steady stream of income even after retirement. Besides, the scheme offers good tax benefits.

Here is why you should consider NPS investments in this fiscal year.

What is the National Pension System?

The NPS is a voluntary retirement savings scheme that the government launched it in 2009 to allow all employees to get a regular pension in their old age. Since 2004, all central and many state government employees received a mandatory pension benefit. But the NPS extended this benefit to all employees (including the unorganized sector) in 2009. However, NPS never reached to the masses, with most investors opting for other Pension schemes. As a result, there are only 96 lakh NPS subscribers who have invested Rs 88,000 crore.

Why you must consider investing in NPS?

NPS offers excellent tax benefits. Both salaried and self-employed individuals can claim tax benefits on Tier I NPS account, under Section 80C of the Income Tax Act 1961. Tier II NPS account does not enjoy any exemptions. These include:

  • EXTRA TAX EXEMPTION: Your contribution towards NPS is eligible for income tax deduction under Section 80CCD. What makes it different from other investments under the Section is that NPS does not count under the Rs 1.5 lakh limit. You can avail an EXTRA tax deduction of Rs 50,000. Therefore, your combined exemption limit increases to Rs 2 lakh (instead of Rs 1.5 lakh previously).

  • NEW TAX BENEFITS: Add to this, in the recently announced Union Budget 2016, the Finance Minister introduced measures to make the NPS even more tax-friendly. The budget proposed to make 40% of the withdrawal of the corpus tax-free. Traditionally, NPS has been an Exempt-Exempt-Taxable (E-E-T) financial instrument. Meaning, your investments/contributions bring tax exemptions; the returns or interest you earn on NPS is tax-free; only a portion of your withdrawals after the age of 60 are taxed. Recently, the government increased the tax-free limit on these withdrawals. This makes NPS more tax-friendly.

  • CHEAPEST PENSION PLAN: NPS has one of the lowest fund management charges associated with it compared to all Pension plans available in India. This is more so when you compare it with similar Pension-related Mutual Funds and Insurances. At the same time, the returns are more or less on the same lines as similar products.

  • MULTIPLE ASSET OPTIONS: As an NPS investor, you can choose which assets you want your money to be invested in – Equity, Debt, Government Securities, etc. Your returns are then market-linked, unlike PPF investments whose rates are fixed by the government. This allows the NPS investment to have a greater scope of delivering higher returns. In fact, Equity-related NPS schemes delivered 24% returns in FY15 while those investing in Government Securities returned around 20%.

  • CAPITAL PROTECTION: The government set a 50% limit on the NPS’ equity exposure. This limits the scheme’s volatility and risk exposure. So, your investments in NPS can be considered safer options that also provide good returns.




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