May 28, 2024

Whether you’re a retiree looking for a reliable source of income or a young professional planning for your future, the various NPS benefits offer a range of benefits worth considering.


Tax Benefits of NPS


EET (Exempt-Exempt-Tax) Regime

The National Pension Scheme (NPS) operates under the EET (Exempt-Exempt-Tax) regime. This means that contributions made towards the scheme are eligible for tax exemption, the investment growth is tax-free, and only the withdrawals made during retirement are subject to taxation. 


This unique tax benefit allows individuals to enjoy tax deductions on their contributions while providing tax-free investment growth. You can also use an NPS calculator online to check the applicable taxes and do the math. 


Additional Tax Deduction

Apart from the regular deductions available under the Income Tax Act, NPS offers an additional tax deduction of up to Rs. 50,000 for contributions made towards the scheme. 

This additional deduction is over and above the deduction limit available for other investments. Individuals can reduce their taxable income and save on their overall tax liability by availing of this benefit.

Tax-Free Withdrawals at Retirement

When an individual reaches the age of 60, they are allowed to withdraw up to 60% of their accumulated corpus without any tax implications. The remaining 40% of the corpus is mandatorily utilised to purchase an annuity, providing regular retirement income. 

The tax exemption on withdrawals ensures that individuals can enjoy their retirement savings without burdensome tax liabilities.

Flexibility and Control

Choice of Fund Manager

Under the NPS, individuals can choose their fund manager, offering flexibility and control over their investments. The PFRDA (Pension Fund Regulatory and Development Authority) has authorised several fund managers who offer different investment strategies and track records. 

By carefully selecting a fund manager that aligns with their investment goals and risk appetite, individuals can have greater control over their pension funds.

Allocation of Pension Funds

NPS allows individuals to allocate their pension funds across different asset classes, such as government securities, corporate bonds, and equities. 

This flexibility empowers individuals to diversify their investments and tailor their portfolios to their risk tolerance and financial goals. 

Portability of NPS Account

Another advantage of NPS is its portability. Individuals can maintain their NPS account even if they change their employment or location. This portability feature allows individuals to continue their investments seamlessly and ensures that their retirement savings are not disrupted. 

The flexibility to carry forward and manage the NPS account throughout their professional journey makes it a highly attractive retirement planning option.

Long-Term Savings and Retirement Planning

Compounding Returns

NPS offers the benefit of compounding returns, as the contributions made towards the scheme are invested for the long term. The power of compounding enables individuals to generate wealth over time as the returns earned on their investments are reinvested, which leads to exponential growth in their pension corpus. 

Individuals can harness the potential of compounding and secure a financially sound retirement by starting early and consistently contributing to the NPS.

Wealth Accumulation

Along with compounding returns, NPS allows individuals to accumulate substantial wealth for their retirement. The NPS contribution made by individuals, along with the matching contributions from their employers (if applicable), can build a significant pension corpus over time. 

By diligently saving and investing in NPS, individuals can create a substantial retirement fund to support their desired lifestyle during their golden years.

Low Expense Ratio

Cost Efficiency

NPS is known for its low expense ratio, which means the cost of managing and administering the scheme is comparatively low. The low expense ratio ensures that a significant portion of the contributions made by individuals go towards their investments rather than administrative charges. 

This cost efficiency maximises the potential investment returns and benefits individuals in the long run.

Minimisation of Charges

In addition to the low expense ratio, NPS minimises other charges associated with the scheme. Fund management, custodial services, and record-keeping charges are kept at a minimum, ensuring that individuals can optimise their investment returns. 

Wrapping Up

The National Pension Scheme (NPS) offers comprehensive benefits, making it an attractive retirement planning option for individuals. We hope this post was helpful.

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