Getting started with NPS

Use this under-explored investment option to maximise your tax savings

Maximise tax savings with NPS: A comprehensive guide

With the annual ritual of tax-saving upon us, many of us will start hunting for investment opportunities to reduce our taxable income by Rs 1.5 lakh and save up to Rs 46,800 on taxes.

Not surprisingly, there are a plethora of tax-saving avenues that will jostle for your attention. Equity-linked savings schemes (ELSS), National Savings Certificate (NSC), Public Provident Fund (PPF), to name a few. But like there's a Lakshadweep to every Maldives, or at least what the current social media 'war' tells us, there's the National Pension Scheme (NPS), a viable, if not better, alternative.

The NPS is tailor-made for not only building a sizable retirement kitty but also reducing your taxable income by an additional Rs 50,000. That's right, the Rs 50,000 income deduction is over and above the Rs 1.5 lakh limit provided by others. More importantly, it is the only avenue that helps you save additional tax.

So, let's show you how to kickstart your NPS journey.

Getting started

One option is to visit your nearest bank and seek their help. Most public and private banks act as intermediaries for NPS.

But if you are tech-savvy and a DIY investor, open your NPS account by visiting the website of any of the three service providers:

Just have the below documents handy and follow the online instructions.

  • A soft copy of your Aadhaar and your signature
  • The mobile phone linked to your Aadhaar (An OTP will be sent to this number)
  • Your bank details and a soft copy of the cancelled cheque

Choosing between 'Auto' and 'Active' investment option

At some point, you will be asked to specify your preferred investment option between 'Auto' and 'Active'.

If you opt for the 'Auto', your investment will automatically be spread across asset classes in a pre-defined way based on your age and the type of fund you choose. There are three fund types:

  • Aggressive lifecycle fund (75-15-10 in equity, g-sec and corporate bonds)
  • Moderate lifecycle fund (50-20-30 in equity, g-sec and corporate bonds) - Default option
  • Conservative lifecycle fund (25-30-45 in equity, g-sec and corporate bonds)

Even in the most aggressive option, the maximum that can be allocated to equities is 75 per cent. That too, till the age of 35. After which it decreases each year until it reduces to 15 per cent by age 55.

On the other hand, the 'Active' choice allows you to keep 75 per cent of your portfolio in equities, no matter your age. Basically, the equity exposure doesn't automatically reduce with increasing age.

Our take
Even the most aggressive plan of the 'Auto' choice is too conservative, especially when investing for a long-term goal like retirement. We suggest going for the 'Active' option and allocating the maximum possible amount - 75 per cent - to equities. The remaining money can be spread equally between g-sec and corporate bonds. This strategy will help accumulate a larger corpus.

Putting NPS investments on auto-pilot

Like SIP in the case of mutual funds, investment in NPS can also be put on auto-pilot using the 'D-Remit' facility. Here is how you can enable it:

  • Use any of the following links (on the basis of your CRA) to generate a 'Virtual ID'.
  • Have your PRAN and linked mobile handy for OTP authentication.
  • You will receive a 'Virtual ID' and the beneficiary bank's IFSC details on your email ID within one working day.
  • Log in to your net banking and add the 'Virtual ID' as a beneficiary, along with the IFSC details of the beneficiary bank.
  • Set periodic auto debit/standing instructions using net banking.
  • The specified amount will be automatically deducted from your bank on the chosen date and directed to your NPS portfolio.

Suggested watch: Should mutual fund investors invest in NPS?

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