Is retirement the beginning of your life or is it the end? It’s definitely the beginning. Retirement is the time when your life is truly yours. It’s the time to catch up on everything you have missed in life. Time for all those holiday trips you have postponed and never gone. But, to enjoy a happy retirement, you need money. You don’t earn after retirement. You need to save and invest for your retirement…NOW. Yes, that’s right. Start saving for retirement, right from the first salary of your first job.
“More than 47% of our young working citizen’s have saved nothing for retirement”. “Another 40% have not saved enough for retirement”. One thing’s sure….All these citizens would most likely not enjoy a happy retirement. Want to be different from the crowd? You need a retirement plan. What better retirement plan than the new pension scheme, popularly called NPS?
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NPS as a retirement plan is very simple. It is a Government approved pension scheme, which helps you save for retirement. You can invest in the NPS, if you are between 18 to 60 years. You have to make a minimum contribution of INR 6000 a year.
You have 2 options to invest in NPS:
In the active choice, you decide how your money is invested in the scheme. NPS allows you to invest up to 50% of your money in equity. The rest is in Corporate and Government bonds.
If you opt for the auto choice, the investment decision is not in your hands. The pension fund manager invests your money according to a plan, as per guidelines, set by the PFRDA (The pension fund regulator).
You can withdraw only 60% of the amount which accumulates at maturity. The remaining 40% has to be compulsorily invested in an annuity plan. If you withdraw from the NPS before 60 years, 80% of your NPS corpus is compulsorily invested in annuity. With an annuity plan you get pension even after retirement.
If you want lots of money at retirement, you need to start investing at a young age. This gives your investment a lot of time to grow. NPS invests up to 50% in equity which gives very high returns with time. You can retire with pots of money.
An investment in equity is risky, if you invest for the short term. (Market volatility affects your investment). In the long run, equity is quite safe. (NPS invests your money in equity for the long term).
NPS has also introduced two new life-cycle funds. One of these life-cycle funds is very aggressive, allowing you to invest up to 75% in equity, till you are 35 years of age.
NPS has the potential to be a hit with the youth of our country. Your money is invested in equity, which is an excellent investment to save for retirement. You easily get returns above inflation.
An investment in the NPS, gives you a lot of tax benefits. You get a tax deduction under Section 80C, up to INR 1.5 Lakhs a year. Then you get a further tax deduction of INR 50,000, under Section 80CCD(1b) of the income tax act, on your voluntary contribution to the NPS.
If your employer contributes, up to 10% of your (basic salary + dearness allowance), towards the NPS scheme in your (employee’s) name, you get a further tax deduction under Section 80CCD(2).
You could expect a further deduction of INR 50,000 under Section 80CCD(1b). The total deduction under the Section 80CCD(1b), would now be INR 1 Lakh.
NPS enjoys income tax benefits under EET regime. The money you invest gets a tax deduction up to INR 1.5 Lakhs a year, under Section 80C. The money you invest grows with time and this is tax free. Withdrawals from NPS are taxed at 60%. Compare this with PPF and EPF which enjoy EEE benefits. The amount you withdraw from PPF and EPF is tax free at withdrawal.
The Government wants NPS to be a strong rival to the EPF and the PPF. This is possible only if withdrawals from NPS are made tax free. Expect NPS withdrawals to be made tax free after Union Budget 2017.
Improvement in medical technologies, have raised the life span of citizens in India. Yes…Citizens are living longer. More and more citizens will soon retire and India badly needs a very good social security scheme. NPS can be that social security scheme. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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