Retirement planning starts with thinking about how you want the rest of your life to look like. You need to have a solid financial plan, complete with different tax saving instruments to have a comfortable and financially independent retirement.
Although setting aside a specific amount is one way to plan for the golden years of life, you can choose to invest in various tax saving schemes to earn good returns and ensure long-term financial security for your loved ones and yourself. Another crucial aspect is taxes.
If you make contributions towards an efficient tax investment plan, you can easily manage to build an additional corpus for your golden years. National Pension Scheme (NPS) is one of the most popular tax-saving instruments, which enable you to create a sufficient retirement corpus.
It is a government-backed voluntary tax-saving scheme available to all Indian citizens aged between 18-65 years. You can invest in NPS throughout the working years of your life. Before you make your mind to choose this investment option or if you are unsure about how to save tax under NPS and other tax-saving instruments, read to know about the plan.
Here is everything you need to know about NPS:
Different NPS Asset Classes
You can invest money in four NPS asset classes – Equity, Corporate bonds, Government bonds, and alternate assets.
There are two different types of accounts under the NPS scheme– Tier I and Tier II.
- Tier I account is mandatory while investing in the scheme. It is a retirement account in which you cannot withdraw your contributions until you reach 60 years of age.
- Tier II account has no restrictions. You can withdraw the money anytime you want. Both types of accounts have different NPS withdrawal rules, which you must follow.
NPS Asset Allocation as Per Investment
The NPS offers two approaches to invest your funds in the account:
- Active Choice
If you opt for an active choice, you have to select a pension fund manager and mention the ratios of funds to be invested among each of the asset classes.
- Auto Choice
In case you are unwilling to exercise any choice regarding the assets, you can choose to invest funds automatically in a life cycle fund. The auto choice involves an investment of 50%, 30%, and 20% of pension funds in E, C, and G class, respectively. The ratios of the investment remain fixed for all contributions until you reach 36 years of age.
NPS fund managers deliver NPS returns, which mainly depend on your asset allocation. It works best as a long-term investment and is also an efficient tax investment option. The earlier you start your contributions towards NPS, the longer time you have to create a substantial retirement corpus.
According to the latest provisions, you can claim tax benefits of up to 10% of your gross income under Section 80CCD (1b) of the Income Tax Act as an NPS account holder. You can claim a tax deduction of up to a maximum of Rs.50,000, over and above the deductions under Section 80C. Therefore, you can save up to Rs. 2 Lakh as tax deductions (including 1.5 Lakh under 80C).
NPS Withdrawal Rules
It is crucial to follow specific NPS withdrawal rules to gain maximum benefits. As an account holder, you need to make investments towards the scheme until 60 years of age. However, the following are the circumstances in which you can withdraw up to 25% of the invested amount:
- In case of your child’s marriage
- For higher education
- For buying or building a house
- In case of a medical emergency
Supplement Retirement Planning Beyond NPS
It is crucial to start building a financial cushion from a young age to fund your retirement years. Along with NPS, you can even consider investing in different tax saving schemes. Various tax-saving instruments offered by reputable insurance companies such as Max Life Insurance.
Thesecomprehensivetax saving instruments provide maturity benefits in the form of both lump sum and regular income benefits that are post-retirement.
The money you create for your retirement will also help you in times of emergencies, be it financial or medical. More than anything else, you would not have to depend on anybody else to support you during retirement. So, make sure you research thoroughly and learn all about different tax saving instruments before investing your hard-earned money. You can also read about various