Independence Day 2023: How to plan your post-retirement financial independence with NPS?

Remember the Nobel laureate Rabindranath Tagore’s famous lines, “Where the mind is without fear and the head is held high”. These simple lines speak so eloquently about the importance of independence and what freedom means to each of us. However, freedom is not free and it comes at a cost and is indeed not possible without adequate financial independence.

This “Independence Day”, it is necessary to foresee and plan your independence from a financial standpoint. The feeling of “independence” is futile without “financial independence”.

Envisage retirement

Imagine yourself 35-40 years later at a stage when the cost of living is way more than the amount you spend today, thanks to inflation. You are retired and have to rely on the interest income on your accumulated savings and investments. But what if you could accelerate your retirement income with an investment plan that practically allows you access to a regular and decent pension income?

The National Pension Scheme (NPS) in India functions as an elective retirement savings program, providing subscribers with an extensive array of investment opportunities. This renders it a dependable and appealing choice for individuals seeking to accumulate funds for their retirement years.

Why invest in NPS?

NPS presents an excellent opportunity for individuals seeking a secure and enticing method to amass funds for their retirement. It furnishes a range of advantages not commonly found in other retirement savings schemes, including:

Market-linked returns: The performance of your NPS investment is directly tied to the fluctuations of the market, offering you the possibility of achieving superior returns compared to conventional pension schemes.

Within the NPS framework, a diverse array of investment options is presented, each with distinct risk profiles. This entails the imperative task of selecting investment avenues that align with your risk tolerance and financial objectives. Should you be inclined towards assuming heightened risks, the option to invest in equity funds is available, potentially yielding elevated returns over extended periods. Conversely, if a cautious approach resonates with you, directing investments towards debt funds is viable, offering a reduced risk stance albeit with comparatively moderate potential returns.

While historical performance does not guarantee future outcomes, individuals committed to long-term investment horizons stand to potentially reap commendable returns from their prolonged engagement with this scheme.

Tax benefits: Under Section 80C of the Income Tax Act, your contributions towards NPS qualify for tax deductions, capped at a maximum of ₹1.5 lakh per annum. This implies that you are entitled to deduct the sum you invest in NPS from your taxable income.

For example, if you allocate ₹1.5 lakh to your NPS during a fiscal year, you can claim a deduction of ₹1.5 lakh from your taxable income, leading to a reduction in your tax liability equal to the deducted amount.

This tax benefit for NPS contributions extends to all individuals, encompassing salaried professionals, self-employed individuals, and retirees. You can avail of this deduction when filing your income tax return for the specific financial year in which the contributions were made. Furnishing particulars about your NPS account and the contribution amount in your income tax return form is necessary. The tax deduction attributed to NPS contributions serves as an effective strategy to both curtail tax payments and foster retirement savings.

Portability: Transferring your NPS account between different jobs or pension fund managers is a smooth and uncomplicated process. This transition can be accomplished either through online channels or offline methods. The procedure involves just a few clicks to seamlessly switch between various investment schemes or pension fund managers, tailoring your choices to match your risk tolerance and your evaluation of fund manager effectiveness.

Flexibility: Upon reaching retirement, you possess the choice to either receive your NPS savings as a consolidated lump sum or decide on a schedule of regular pension disbursements.

In the scenario where you opt for a lump sum withdrawal, it's important to note that the amount withdrawn is subject to income tax. The applicable tax rate will be contingent on your specific income tax bracket.

Alternatively, should you choose the avenue of periodic pension payments, the payments you receive will not be subjected to income tax. However, these pension disbursements will be subject to Tax Deducted at Source (TDS). The rate of TDS applied will be determined by your particular income tax bracket.

Apart, you have the flexibility to combine both options by splitting your approach. For instance, you might decide to withdraw 50 per cent of your NPS savings as a lump sum while utilising the remaining 50 per cent to procure an annuity, thereby securing a dependable income stream for your lifetime.

Determining whether to opt for a lump sum withdrawal or periodic pension payments is a personal decision. It necessitates a careful evaluation of your individual financial requirements and aspirations to arrive at the most suitable choice for your circumstances.

For those seeking a dependable and appealing strategy to secure their retirement, the NPS emerges as a compelling and sound choice.

Easy transfer of superannuation funds: An advantageous feature of the NPS is the option to seamlessly shift Superannuation Funds. Superannuation, a retirement savings mechanism prevalent in numerous countries, can be transferred into your NPS account. To effect this transfer, you must initiate contact with the pension fund manager overseeing your superannuation fund and formally request the transfer. Subsequently, the pension fund manager will facilitate the transfer of your funds to your NPS account. Once the transfer is complete, your superannuation funds will be subject to the same management principles as any other NPS investment.

The transfer of superannuation funds into the NPS framework presents a compelling avenue for retirement savings. It offers the advantage of diversifying your investment options and a more adaptable withdrawal structure, thereby enhancing the potential to secure your future.

How to select the right investment options in NPS?

Making informed choices about your NPS investment options is a pivotal decision contingent on your personal circumstances and risk tolerance. When making this choice, deliberate upon the following factors:

Age: Age stands as a cornerstone when assessing NPS investment options. Youth allows for greater risk accommodation, given the time available to recuperate from potential losses. Conversely, proximity to retirement necessitates a more conservative approach to safeguard funds over a lengthier post-retirement phase.

Risk appetite: Your appetite for risk bears significant weight in the selection of NPS investment avenues. Should you be comfortable with risk, opting for options with the potential for higher returns, such as equity funds, could align well. Conversely, risk-averse individuals are better suited for options with a more conservative risk profile, like debt funds.

Financial goals: The alignment of your financial objectives is also paramount. For shorter-term needs, liquid investment options like liquid funds provide flexibility. However, long-term aspirations could lean toward investment avenues with prospects for heightened returns, such as equity funds.

Time horizon: Your time horizon, the period till when you plan to withdraw from NPS, substantially influences your risk-taking capacity. A lengthier horizon permits more risk exposure, allowing recovery from downturns. Conversely, a limited horizon necessitates a cautious approach to ensure fund longevity.

Tax bracket: Your tax bracket plays an integral role in the decision-making process. Individuals in higher tax brackets may incline towards investment options entailing tax benefits, like equity funds.

Comprehensively evaluating these facets ensures a well-informed choice, tailored to your unique financial circumstances and aspirations.

More investors warming up to NPS

The scheme is gaining increasing popularity as a preferred retirement savings avenue in India. The count of NPS subscribers has surged from one million in 2010 to surpass 80 million by 2023. This remarkable expansion can be attributed to various factors, including:

• Escalating awareness regarding the importance of retirement savings.
• Appealing attributes of NPS encompass market-linked returns, tax advantages, flexibility, and portability.
• Government initiatives to promote NPS as a prime retirement savings solution.
• Administered by the PFRDA, the NPS operates under stringent regulatory oversight. Its commitment to transparent investment norms bolsters accountability, while the regular scrutiny and performance assessments of fund managers by the NPS Trust contribute significantly to fostering investor confidence.

It is not enough to put money in market-linked funds and traditional options to save enough for the future. There is a need for a regular pension income to meet daily expenses. Choosing to invest in NPS can ensure high yields along with access to more money through a pension.