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How does investing in NPSs combine tax savings with wealth creation to get the best of both worlds?

If you were fortunate enough to inherit wealth, retirement planning might not be a pressing concern. However, for self-made individuals, the National Pension System (NPS) is a crucial addition to their investment portfolio.

The NPS was introduced by the Central Government to assist individuals in securing a retirement income. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act, 2013, the NPS offers opportunities for tax savings and wealth creation.

1) Tax Savings:

The NPS provides tax benefits under Section 80C of the Income Tax Act. Subscribers can claim deductions of up to Rs. 1.5 lakh annually on contributions made to their NPS Tier-I accounts. This deduction reduces taxable income, resulting in lower tax liability.

Additional Deduction under Section 80CCD (1B): In addition to the Section 80C deduction, the NPS offers an exclusive deduction of up to Rs. 50,000 under Section 80CCD (1B). This additional deduction is a significant tax-saving advantage for NPS investors.

Furthermore, there’s a deduction of up to 10% of the basic salary under Section 80 CCD (2) for corporate employees who have NPS contributions deducted from their salaries. This deduction is capped at Rs. 7.5 lakhs.

Tax Exempt at All Stages: NPS enjoys tax-exempt status at all stages. While contributors can claim tax deductions on NPS contributions, withdrawals (up to 60%) are also tax-exempt. This makes NPS an Exempt-Exempt-Exempt (EEE) category product.

Suitable under Old and New Tax Regimes: NPS investments through salary deduction (80 CCD (2)) are available under both the old and new tax regimes, making them versatile for corporate employees.

2) Wealth Creation for Retirement:

Market-Linked Returns: NPS offers various investment options, including equity (E), corporate debt (C), government securities (G), and alternate assets (A). This flexibility allows investors to customize their NPS portfolio based on risk tolerance and investment goals. The equity component offers the potential for higher long-term returns.

NPS subscribers can adjust their equity participation (with a maximum of 75% in the NPS Tier 1 account). They can also invest up to 100% in an Equity Scheme within the NPS Tier 2 account, although this comes with no associated tax incentives.

Long-Term Savings: NPS is designed for retirement savings, promoting long-term wealth accumulation. This extended investment horizon facilitates the creation of a substantial retirement corpus. NPS investors benefit from the compounding effect over time as contributions grow and generate returns. This compounding effect significantly enhances the investment value, creating substantial wealth for retirement.

Investing in NPS, regardless of economic fluctuations, offers several advantages to Indian investors. It provides portfolio diversification, reduces tax liabilities, and ensures systematic progress toward retirement and pension goals. NPS is also a cost-effective financial savings instrument, portable across jobs and locations, making it a valuable choice for retirement planning.


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