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  • Category: Investments

    Is it worth to invest in National Pension Scheme for retirement?


    Wondering if it is okay to invest in National Pension Scheme? Looking out for detailed information regarding the same? Here, on this page our experts have provided you advice to decide for investment.

    National Pension Scheme (NPS) offers additional INR 50k tax exemption. I have some confusion related to Tier I and Tier II, general investment.
    Does it offer tax exemption in both Tier 1 and 2?
    Moreover I have read somewhere that Annuity income is taxable. Is that correct?
    Can we withdraw invested amount in any Tier after some year?
    What type of scheme we can select if we want tax benefit with good return also?
    Is it available for Private sector employee?
    I am expecting genuine guidance from someone who is having expertise in NPS.
  • Answers

    2 Answers found.
  • National Pension Scheme (NPS) is a social scheme launched by the Central Government for organized as well as unorganized sector. Initially, it covered only the Central Government employees but now it covers all the sectors i.e. Government, as well as Private sector employees, even unorganized sector employees, are covered except Armed forces.

    It is a pension scheme that aims to provide a steady stream of income after retirement as well as a lump sum corpus to the beneficiary of this scheme.

    Investment in NPS offers an additional deduction of Rs. 50,000 under section 80CCD(1B) and this is over and above the Rs. 1,50,000 limit under section 80C to 80U.

    Tier I and Tier II account have their own merits and demerits. To opt for a Tier II account one must first have a Tier I account. NPS Tier I is a traditional pension/retirement scheme that has rigid rules while the Tier II account is flexible but offers different benefits.

    NPS Tier and Tier II differs in terms of withdrawal and exit rules.
    Tier I plan is primarily accumulation and distribution which is subject to partial taxation on maturity.
    The plan is somewhat like this:
    - On maturity, a person can withdraw 40% lumpsum of the total balance.
    - 40% has to be left compulsorily for purpose of disbursal of pension, but the withdrawal will be taxable at the applicable tax rate.
    - In short, total 60% can be withdrawn but subject to taxation and specified purposes like child marriage, education, critical illnes..
    - Deduction is available in Tier I plan under Section 80C hence tax benefits available.
    - Minimum contribution of Rs. 6000 is needed to be doe every year.

    Tier II plan is more of investment plan but lacks most of the benefit of Tier I plan i.e. there is no tax benefit available.
    Tier II plan has no tax beenfit but has the benefit of withdrawal at ant times and any number of times.
    There is no minimum contribution requirment. In a year there can be Nil contribution too.
    Withdrawal from Tier II plan is fully taxable and not just the profits but the principal contribution also at the tax slab rate applicable to you.

    Principal contribution is taxable in case of Tier I plan also at the time of withdrawal.

    NPS is more of a security scheme rather than a investment scheme, so choosing NPS for purpose of earning good return is subjective. A lot of factors will play a role in that. Since the money invested in NPS is put into equity, hnece the returns are subject to market conditions and the fund managers managing the fund invested.

    In long term the scheme can be beneficial but still guarantee regarding the same cannot be given except for the chosen annuity.

    Choosing Tier I or II plan for good return does not come into picture as you cannot opt for Tier II plan directly. you will ahve to choose Tier I plan initially and then shift to Tier II and lose the tax benefits available and this is totally voluntary.

    Live before you leave.

  • Yes. It worth investing in the National Pension Scheme (NPS). The main advantage of the scheme is that it provides additional tax benefits of Rs. 50,000 beyond 80 C i.e. Rs 1,50,000. This NPS scheme provides a corpus that makes oneself independent after retirement. One should opt for NPS and should also invest in PPF. This is my personal recommendation.

    Dr. Paresh B. Gujarati.
    Mechanical Engineer.
    'I'mprovement always begins with 'I'.


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