NPS or the National Pension System is one of the less talked about investment options available. You will rarely hear the business channels or newspapers asking you to invest in NPS.
There are good enough reasons for this. It’s a very low cost, Government of India product. No distributors or fund managers are making big bucks selling this. Yet, it should be an integral part of your portfolio.
The low cost and tax benefits make NPS one of the best available tools to build a corpus for retirement.
What is NPS?
NPS (National Pension System) is a Government of India scheme aimed at:
- Building savings for retirement
- Providing post-retirement income
Investment can be made at any time until the age of 65. Post-retirement (at age of 60), 60% of the fund can be withdrawn as a lump sum. This is tax-free. With the remaining 40%, you have to buy an annuity. An annuity is an annual income option for the balance amount.
Investments in NPS are locked in till age 60.
Opening an NPS account Opening an account and contributing to NPS is simple, and can be done online through the website of NSDL.
5 reasons why NPS is a great investment option:
1) Voluntary Contributions: The amounts and timing of contributions are up to the account holder. Opening an NPS account itself is voluntary.
2) Low Charges: Fund management and other charges are very low. (Cumulative charges are less than 0.5%). Compare this with mutual funds that charge between 1 and 2%.
3) Asset Allocation: The investment is distributed in a mix of equities, government bonds, and corporate bonds.
You can choose the asset percentage manually or select an automatic option that decides the mix based on your age.
4) Tax benefits: Investments in NPS are eligible for Rs. 50,000 tax deduction each year. On withdrawal, 60% of the amount is tax-free and the balance goes towards an annual income plan.
5) Long Lock-In: While some may consider this is a drawback, it is a big positive. The long lock-in forces investors to stay invested at all times and enjoy the benefits of compounding.
Low cost and flexible, the humble NPS needs to be a part of your investment portfolio. At 60, you will thank your younger self.
HDFC has a pretty cool NPS calculator to compute the retirement amount and annual income. Check it out here.