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What is NPS?
The NPS is essentially a market-linked retirement planning tool in which you can invest to create a corpus for your retirement. When you invest in the NPS, your money gets invested in market-linked securities, including equities, debt, or both, and a professional pension fund manager manages these investments.
The NPS investors can choose between the Active Mode and Auto Mode. In the Active Mode, the investors can manage their investments themselves by switching between debt and equity. In the Auto Mode, the fund manager has the complete freedom to handle the investments on behalf of investors.
As per the current rules, the minimum investment in NPS is ₹500 every year. At your retirement age, you can withdraw a certain percentage of the accumulated corpus, and the remaining amount will be used to provide you with a regular income after your retirement. Depending upon the scheme chosen by you, you can get long-term returns between 9 to 12 percent by investing in NPS.
Why to Invest in NPS?
As you can see, the primary objective of the NPS investment scheme is to provide you with tax-free annuity benefits at the time of your retirement. You can invest in the NPS to get good returns from the market and create a corpus for your retirement. It also provides tax benefits of up to ₹50,000 under Section 80C of the Income Tax Act.
Here are a few reasons why we should invest in NPS:
- It works as a source of earnings after your retirement: As we’ve mentioned before, NPS allows you to withdraw a percentage of your accumulated corpus as you approach retirement. The remaining amount is used to provide you with annuity benefits in the form of regular income after your retirement. You can use these earnings to meet your daily expenses when you don’t have any other source of income.
- It is a low-risk investment instrument: Although NPS invests in market-linked securities, it entails lower risk than other money-market instruments, such as stocks, mutual funds, etc. NPS is a government-owned scheme, and hence, the equity cap ranges between 50 to 75 percent. This percentage keeps on decreasing as an investor approaches their retirement, making it a relatively safer instrument.
- Guaranteed returns: Although a portion of the NPS is invested in equities and doesn’t offer assured returns, the overall returns from the scheme are guaranteed. Moreover, the returns offered by NPS are higher than other fixed-income instruments, such as Fixed Deposits and Public Provident Fund (PPF).
Are There Any Limitations?
While NPS is a useful retirement planning scheme, it has a few limitations. You should not invest in the NPS if you want to invest in 100% equities or if you do not want to lock your funds for a long period. Moreover, NPS offers a fixed income for the lifetime along with a lump sum on maturity.
The Final Words
NPS is a very useful tool to create a corpus for your retirement and ensure a regular income during your golden years. It also offers considerable tax benefits. However, you should not invest in the NPS only for tax benefits. Also, you should keep its limitations in mind while deciding to invest in it.
