When the National Pension System (NPS) first became available over 6 years ago, there was not much interest shown by the potential investors. The main reasons for the lack of interest were the complexity of opening an account and the tax treatment that the maturity benefits entailed.

Even in the budget last year (2015), the Finance Minister did not make any changes to the features of this scheme. However, an additional deduction of Rs. 50,000 under Section 80 CCD (1B) of the Income Tax Act was included as a bigger incentive. This additional limit is over and above the current limit of Rs. 1.5 lakhs available under Section 80C.

Should an individual invest in the National Pension System (NPS)?

With the additional tax benefit, NPS is now an attractive investment avenue to include in retirement planning. However, investors need to consider their risk profile before they include this tax saving scheme in their overall financial portfolio.

Subscribers can invest in different asset classes, such as equity, corporate bonds, and Government securities. However, maximum exposure to equities is capped at 50%.

Amount to invest in NPS

Although there is no limit on the maximum amount that can be invested under the plan, the tax benefits are available:

(a) for an amount up to Rs. 1,50,000 under Section 80CCD(1)

(b) additional amount of Rs. 50,000 under Section 80 CCD (1B) from FY15-16 and

(c) for individuals employed by Central Government or any other employer, in addition to the above two (a and b), 10% of Basic + DA can be invested and tax exemption can be claimed under Section 80CCD2

However, investing this entire amount at once is not recommended. It is advisable to stagger the amount over a period of time. A transaction fee of 0.25% (minimum Rs. 20) per contribution is levied.

NPS Lite Swavalamban

The Government is also offering a retirement plan for poor people and low-income groups belonging to the unorganised sector with minimal or no education. Under the NPS Lite scheme, the Government offers an incentive by investing Rs. 1,000 per annum for accountholders who contribute between Rs. 1,000 and Rs. 12,000 per year.

The NPS Swavalamban Yojana is being offered at very low administrative costs and transaction fees for easily investing smaller contribution amounts. The scheme is aimed to provide some financial security to low-income families after retirement.

Having understood about NPS and its tax benefits, you can use pension plan calculators to determine the monthly annuity you will need to sustain your current lifestyle after retirement. The lifestyle calculator will also help you find out the monthly savings you need to achieve this goal.