My company has tied up with HDFC for NPS. We can save tax up to 10 per cent of the basic salary and additional ₹50,000 if we invest in this product. I am 37 years old and I have three dependents. I am in the 20 per cent tax bracket. I also invest ₹20,000 in large-cap and diversified equity mutual funds every month through a Systematic Investment Plan (SIP). I also have some investments in debt funds. I don't have investments in any other pension product and my company doesn't give a pension after retirement.I have exhausted the ₹1.5 lakh investment (in PPF and LIC) limit under Section 80C. Should I invest in NPS?
- Jitesh Bhatia
You should opt for National Pension Scheme (NPS) if you want a tailor-made government-backed retirement product. It also forces you to save regularly, save on taxes and build a retirement corpus. If withdrawal is made after 60 years of age, at least 40 per cent of the accumulated funds must be used to buy an annuity. The rest of the money can be withdrawn in a lump sum. If the total corpus is below ₹2 lakh, it can be withdrawn entirely. if you are exiting the NPS before 60 years, one can withdraw only 20 per cent of the funds as a lump sum and one must use 80 per cent of the funds to buy an annuity.
You haven't said whether your employer is going to match your contribution in NPS. If the company is also matching your contribution, that is an additional incentive for you to join the scheme. You can claim a tax deduction on your contribution as well as your employer's contribution. You can also claim an additional tax deduction of ₹50,000 on your contribution to NPS. These are tax advantages.
However, if you are a disciplined investor you can also bank on equity mutual funds to create a retirement corpus. Equity mutual funds have an edge over NPS on two counts. One is taxation. Investors need not pay any tax on the returns on investments in equity mutual funds held over a year. The withdrawal from the NPS is taxed. The money will be added to the income of the investor and taxed as per the applicable tax slab. Even annuity income, bought with the remaining corpus, is taxable.
This article was originally published on December 10, 2015.
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