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National Pension Scheme
A retirement planning tool which helps you save taxes too!
The National Pension Scheme is a social security initiative by the Central Government. This pension programme is open to employees from the public, private and even the unorganised sectors except those from the armed forces. The scheme is also applicable for non-salaried individuals having income from Business or Profession. The objective of the NPS scheme is regular contribution by an individual during the course of working life (either from salary or Business and Profession) to accumulate adequate corpus for post-retirement pension. After retirement, the subscribers can take out a certain percentage of the corpus and balance as Annuity or monthly pension.
Earlier, the NPS scheme covered only the Central Government employees. Now, however, the PFRDA has made it open to all Indian citizens on a voluntary basis. NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.
Salaried individuals especially in higher tax bracket should invest in NPS. This is because of the immediate tax benefit it offers. The total tax benefit from NPS is total of the following:
- Upto Rs 1.5 lacs under section 80C
- Upto Rs 50,000 under section 80CCD over and above Rs 1.5 lacs
- Upto 10% of Basic Salary – Contributed by the Employer over and above both of the above.
So effectively for an individual earning say Rs 15 lacs as annual salary of which Rs 10 lacs is Basic component and is in the 30% Tax bracket, the following will be the Tax benefit of investing in NPS.
Tax Benefit of NPS
Head | Deduction under section | Maximum Deduction from Tax allowed | Tax Benefit @ 30% | Salaried /Self employed |
NPS contribution by an Individual | 80C | 150,000 | 45,000 | Both. For self-employed Deduction is capped @ lower of 20% of Gross Income or 1.5 lacs. |
Additional NPS contribution by an Individual | 80CCD (1B) | 50,000 | 15,000 | Both |
10% of Basic Salary # | 80CCD (2) | 100,000 | 30,000 | Salaried |
Total |
| 3,00,000 | 90,000 |
|
# This benefit increases as the salary income increases as there is no upper limit on amount of deduction that can be claimed.
As can be seen from the above table an individual can save tax of Rs 90,000/- by contributing to NPS Rs 300,000. As the salary level increases the Tax benefit also increases.
In the above example say the salary is Rs 30 lacs pa of which Basic component is Rs 18 lacs, annual tax benefit would be 1.14 lacs !
Tax saving is fine but what about Returns?
So all instruments where there are tax benefits in form like PPF/NSC/ LIC/ Insurance plans (Non Term) / EPF/ FD/ SCSS/ SSY give returns in the range of 6-8.5%. NPS allows an individual to choose between Equity and Government Bonds. Assuming default contribution of 50% in Govt bonds and 50% in Equity average NPS returns have been in the range of 10%-12.5%. while equity returns can be volatile on a year on year basis, over longer term Equities have given higher returns than Fixed income. Still for risk averse investors, they can choose not to opt for Equity and invest entirely in Govt bonds / Corporate bonds.
To conclude
All in all, NPS is not just the best instrument for Retirement Planning both in terms of Tax Saving as there is no upper cap in amount terms for Tax benefit for salaried individuals AND in Returns wise also it is amongst the Best!!! Only ELSS schemes of Mutual Funds have given better returns than NPS from the basket of Tax saving instruments.
Are there any drawbacks
NPS is a very good tax saving and investment vehicle for the purpose of retirement planning. Only disadvantage being withdrawals are not generally permitted before retirement unless for certain specified purposes. So investments are locked in till retirement. However, If one plans accordingly, its a great retirement savings tool available with twin advantages of tax benefits & good returns.