NPS - Government-backed retirement instrument

It's a strange coincidence that 'pension' rhymes with 'tension', but the fact is that the two are inversely related. A good pension to support your expenses during retirement will make your twilight years easy and simple to navigate. The earlier you start, the better off you will be. And one of the best retirement savings instruments to begin is the National Pension System (NPS). The NPS has two types of accounts - Tier I and Tier II. In this article we will focus only on Tier I since it is geared primarily towards pension saving. The Tier II account is also a great option for non-retirement and short term saving but we shall discuss that, elsewhere.

A government of India initiative, the NPS Tier I is simple and low cost. Here are 6 reasons why we recommend it to investors:

1. It's open to everyone
All citizens of India (resident or non-resident) between the ages of 18 and 60 can open an NPS account. It is thus available to both employees and self-employed persons.

2. You get a tax break
NPS investments are eligible for tax deductions of up to R1.5 lakh a year under Section 80CCD. Budget 2015 increased this amount by another 50,000. So, you can get a deduction by contributingR200,000 to the NPS or just top up your EPF/PPF/ELSS investments of 1.5 lakh with an NPS contribution of 50,000. Upon maturity at the age of 60, only 40% of your NPS pot is tax free. However, after retirement your other income may be lower (since you are no longer employed/self-employed), allowing you to remain in a low tax slab and save on tax.

3. You get exposure to equity
History has proved time and again that equity is the best asset class for the long term. Few 80C products allow you to gain exposure to it and NPS is one of them. It balances out this exposure (which is capped at 50%) with corporate and government bonds. The result has been stellar returns. The lock-in aspect of the NPS also prevents you from making short sighted investment decisions propelled by greed and/or fear.

4. Its cheap and low-effort
The NPS has one of the lowest cost structures among the investment options available. The Pension Fund Managers who manage your money charge as little as 0.01%. The other charges involved are also low.

You can choose your NPS allocation between equity, corporate debt and government debt funds. However, for those who do not wish to worry about this decision, help is at hand. You can simply pick the auto allocation option under the NPS which will distribute your money based on your age and automatically re-balance as you grow older. Stress, busted!

5 It's easy to contribute to and manage
You can open an NPS account through your nearest Point of Presence Service Provider (PoP-SP) or online through eNSDL. You can also view your balance and manage your account online through the NSDL website. In order to do this, make sure to note down the Permanent Retirement Account Number (PRAN) that will be sent to you.

6. You can extend the tenure till you are 70
After attaining 60 years of age, you have an option to continue investing in NPS up to the age of 70 years under the all-citizens model (which excludes Government employees).

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