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What Are The Benefits Of Investing in NPS At An Early Stage?

Adhil Shetty


Q. I am 39 years old. I was reading an article on the benefits of investing in the National Pension Scheme at an early age. However, I am still not convinced if I should lock my money for 21 long years. Please help me understand I will benefit from investing in NPS and how will I be taxed? – Gaurav Sen

A. National Pension Scheme is a wonderful way to build a corpus for your golden years. It is an investment for the long run, but you should not see this tenure as your money being locked or inaccessible. You should see this as an opportunity for your money to grow handsomely. For example, if you invest Rs. 5,000 every month for the next 21 years, you will build a corpus of approximately Rs. 42.44 lakh assuming an average annual rate of return of 10%. Out of this, you can withdraw up to 60% tax-free. The remaining 40% will mandatorily be invested in an annuity scheme to provide you with a monthly pension after retirement.

Having said that, you should also know how NPS works. Once you opt for this scheme, you will have to make regular contributions to it. When you invest in NPS, part of your investment is exposed to equity, which can help you get higher, long-term returns. There are two types of accounts in NPS – Tier 1 and Tier 2, where the former also provides tax breaks but has lock-ins, and the latter provides no tax breaks but can be liquidated any moment.

If you invest in NPS, you can avail tax benefits for your contributions under Section 80CCD(1) for an amount up to Rs 1.5 lakh in a financial year for both yours and employer’s contribution. However, it is important to note that this limit would also include other deductions under section 80C.

For self-contribution, a salaried individual can claim a maximum deduction of 10% of salary under Section 80CCD(1) whereas a self-employed individual can claim 20% of the gross income.

You can also avail additional tax deduction under section 80CCD(1) for a self-contribution of Rs. 50,000 in a financial year.

Besides the tax benefits, if you are looking at investment for retirement, NPS is a good choice. The government backing and pocket-friendly contributions make it an attractive choice.

Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.