6 strong reasons why you should never miss NPS in your tax planning

At Finbingo, we always favor low-cost & transparent financial products to young investors to help save tax and create wealth. In this context, one superb financial product we recommend is the National Pension Scheme, also known as NPS.

In this post, we tell you 6 strong reasons why you should start investing in NPS. So, grab a cup of coffee & read on….

If you opt for the old tax regime, Investment in NPS also qualifies for an additional tax deduction of INR 50,000 under Section 80CCD (1B). For a person falling in the 30% tax bracket, this means an extra tax saving of around ₹15,000 per year.

Consider this tax-saving as an “extra investment” towards your retirement corpus. In that case, this extra investment made over the next 25 -30 years can make a massive difference in your retirement fund. Another way of looking at it is that the tax-saving increases your take-home income & frees up money to invest in other tax avenues.

As per the present tax rules, you can straightway withdraw 60% of the corpus tax-free at maturity. For the balance of 40%, you need to buy an annuity; however, there is no tax payable when purchasing the annuity. So, effectively, 100% of withdrawal is tax-free.

Only the monthly annuity payments that you receive will be taxable. Even this income would qualify for the base tax exemption limit, which means that only a portion of it may end up getting taxed.

Over the years, the Government has made NPS taxation rules very much friendly & attractive for investors. This tax treatment puts it almost in the same league as PPF and EPF & makes NPS an attractive investment for a young investor.

As a young investor, you think retirement is far away – why I should worry about it now? And this is the mistake which makes people start investing only in their 40s. The problem is that by this time, you lose out on the power of compounding. The late you start your retirement planning, you need to invest per month.

NPS really helps you in compounding so that, unlike other investments, the money you invest in NPS is locked in until you reach 60 years of age. You may think this is a minus point. But no, it’s a blessing in disguise. Lock-in saves you from being tempted to spend your precious retirement savings on unnecessary expenses like buying expensive phones or splurging on vacations.

Remember: You can get a loan for almost every damn thing nowadays, but when you reach old age, no-one will give you a loan for your retirement. The amount you invest today in NPS may pinch you, but you will bless yourself for your wise decision when you become old.

In ELSS and ULIP, the fund management fees are anywhere upwards of 2%. Compared to this, NPS fees are a measly 0.01% of the AUM. Can you imagine how much difference this cost-saving can make to your retirement portfolio over 30 years?

Also, NPS is very closely regulated and monitored by the regulatory body PFRDA. This means that at all times, your rights & interests are well protected. This is very important considering the long-term nature of investment & the critical nature of the financial goal that you’re saving your hard-earned money for.

As a young investor, NPS gives you the flexibility to choose from multiple fund managers and fund allocation options.

Regarding fund manager selection, you can quickly look up each fund’s past performance to help you decide. Even after investing,, It is also effortless to switch funds online mid-way if you find a drop in performance.

As regards fund allocation, you get the freedom to choose between active & auto asset allocation. If you are an informed investor & know how markets work, you can plan the equity allocation, which can go up to 75%. However, if you are a passive investor, auto allocation balances your asset allocation automatically as per your age.

It is effortless to open an NPS account online from the comfort of your own home. You get a Permanent Retirement Account Number (PRAN) which does not change even if you move cities or change jobs.

When you open an NPS account, you get access to the online portal that you can use to manage your account online. In the portal, you can see an update on your account, download statements, check fund performance, make fresh investments, switch between funds.

No repeated calls to customer care, no visiting any offices… isn’t that great?

NPS ticks all boxes of what you as a young investor want from your tax saving investment – low cost, transparency, ease of investing, flexibility, and tax savings. So, don’t delay. Start investing every year & secure your retirement!