NPS (National Pension Scheme) offers you to invest some amount of money and use the money after retirement. It gives you some tax benefits along the way. However, not all of us know whether these benefits are actually beneficial for us or not.
Firstly, let’s have a look at the features of the NPS scheme:
- All citizens of India between the age of 18 and 60 years can make the investment.
- On death, the entire corpus will be paid to the nominee.
- Follows EET (Exempt-Exempt-Tax) methods for taxing of savings i.e the amount is taxable at the time of withdrawal.
- The 40% withdrawal at the time of your retirement will be tax-free.However, rest 60% of the corpus will be treated as taxable income.
NPS Tier 1 Account vs Tier 2 account
|Types of Investment||Tier I Account||Tier II Account|
|Min. contribution per annum||₹ 6,000||₹ 2000|
|Withdrawal Limit||Before attaining 60 years: 20%
After attaining 60 years: 60%
(rest amount is converted into pension)
|Tax Saving||Upto ₹ 50,000 under Section 80CCD||Not available|
Why should I opt for NPS :
- Tax-saving: Tax on ₹ 50,000 under Section 80CCD can be exempted. This is additional to 1.5 lakhs which can be invested in PPF, insurance or tax-saving mutual funds that come under 80C.
- Low cost: Low fund management charge i.e 0.01%.
- Compound interest: The principal amount gets compounded with the interest every month.
Reasons for not opting NPS:
- Partial tax Exemption on withdrawal: One can take tax benefit on only 40% of the withdrawal amount. Rest 60% is still taxable.
- Long locking period: We can withdraw only 20% of the amount before 60 years.
- No fixed return: The returns are market-linked so there is no certainty. It varies from 5 to 7 percent per annum.
- Compulsory annuity investment: It is mandatory to invest the remaining 40% amount for buying the pension annuity.
Therefore, the scheme needs to be in a way such that it benefits us. We can invest ₹1.5 lakhs in some better investment scheme such as mutual funds or PPF and invest ₹ 50,000 in NPS in order to avail more tax rebate.This way we are saving something for our future while saving some taxes in present. It is also helpful to compare NPS with other saving schemes.
Want to open an NPS account? Find all the details here.
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