Every individual must haves a proper retirement fund. This fund protects you financially after your retirement once your monthly income stops.
Now, there are several ways in which you can save money for a retirement fund. There are many investment options you can choose from here. Of which, the national pension scheme (NPS) is one the most popular.
But how do you invest in an NPS scheme? Normally, people tend to invest in monthly instalments, but can you invest in a lump sum? Let us explore NPS and see different investment options.
What is NPS?
The National Pension Scheme is a social security pension scheme managed by the central government and launched to encourage the common public. Initially launched for government employees, not the fund is open to all citizens of India working in different government and non-government sectors.
The scheme is designed so that you can invest regularly in the NPS scheme to slowly yet steadily build a retirement corpus. The tenure of the investment is till the age of retirement. At retirement, you have the option to withdraw a certain part of the investment free of tax. Whatever corpus is left in your NPS account will be received as a monthly pension.
NPS was initially introduced only to central government employees. But seeing the popularity of the NPS, the government has increased its eligibility to people of all sectors. This is also done to encourage more people to invest in a pension fund.
NPS also comes with certain tax benefits. Up to 60% of the corpus at the time of retirement is tax-free. That is the maximum amount of money you can withdraw at the time of retirement as well. Your investment towards NPS is tax-exempt for up to Rs.1.5 lakh deduction under section 80C of the Indian income tax act 1961.
Features of NPS
The advantages of investing in NPS are not limited to the ones mentioned above. Let us see what other benefits it carries.
Unlike other pension schemes, NPS invests a portion of your investment in equities. This may not guarantee a fixed return, but it has more return potential than other investment schemes such as PPF, etc.
If history is to be believed, the NPS has given annualised returns of between 8 to 10% so far. Experts believe this is going to continue shortly as well. One great advantage here is that you have the option to change the fund or fund manager to better manage your fund.
Even though there is equity exposure in the NPS scheme, there is an upper limit of 75% in the equity presence. That means, if there are 100 securities in an NPS portfolio, the maximum exposure of equity is 75.
This is different in the case of government employees. For them, the cap is 50%, and the same gets reduced by 2.5% every year until the age of 50. This is done to ensure that the risk is kept at a minimum.
But for an NPS subscriber who is not a government employee, the cap is at 50% after the age of 60. This is done to make sure the risk is kept minimum at an age when an investor’s risk appetite becomes low. Capital lost at this age may be difficult to recover due to time constraints. But even when NPS schemes have this cap, they tend to give more returns than traditional savings schemes.
Both lumpsum and SIP investment are allowed in the case of NPS. However, the decision should be based on your investment goals and available corpus.