Most investors are unaware of this tax exemption under 80CCD(1B) popularly known as NPS(National Pension Scheme). Investing in NPS comes with a lock-in until the age of 60.
What are the benefits of NPS?
- Can save additional tax apart from investment in 80C(1.5 Lakhs). Investors can invest up to 50 thousand to claim this tax exemption.
- Consider this as a retirement product as the name suggests and it comes handy at old age. Investing 50k when your earning are good is always better to have forced investment for an unseen future.
- Up to 60% of the accumulated money is up for withdrawal is tax-free at the age of 60.
List of Pension Fund Managers
- HDFC Pension Management Company
- SBI Pension Funds
- ICICI Prudential Life Insurance Company
- Kotak Mahindra Asset Management Company
- LIC Pension Fund
- UTI Retirement Solutions
- Birla Sun Life Pension Management
The options investors have here is active or auto
- Active: Here investors are choosing the % of investments into E(Equity), C(Corporate debt), G(Government Securities). Equity cannot be more than 75% of the investment.
- Auto: Here allocation is decided based on investors age, by default equity exposure is 50% until the age of 35 then every year 2% is reduced so as to bring to 10% at the age of 55 years. Corporate debt is 30% till the age of 35, this starts reducing by 1% to bring to 10% by the age of 55 years. Exposure in govt securities is 20% till the age of 35, this keeps increasing gradually every year. Risky investments reduce as investor age advances.
Other facts to know:
- If investors want to withdraw before they turn 60, they have to buy 80% of the corpus into an annuity(Insurance scheme). 20% of the remaining corpus will be tax-based on the investor’s slab.
- In the case of death, the nominee will receive all the corpus and need not buy an annuity.
- The minimum contribution is Rs.1000 per annum to maintain the account.
- Things to keep ready while opening NPS account Soft copy of a) PAN b) Aadhaar c) Passport size photo d) Signature on plain paper.
Investors falling under the highest tax bracket(30%) should opt for this tax-saving option in the longer run, Just to save tax do not opt any tax saving option, do understand their risk-return profile whether they suit you or not. Investments made here can be somewhere between 14-18 Lakhs if you have started late at (32 Years or earlier at 24Years). This won’t turn out to be a huge corpus but will save tax upfront and have a meaningful corpus at the age of 60.