How To Get More Than Tax Savings With NPS
Author: Sanjay Sharma
As the financial year draws towards to a close, many of you would be looking to maximise your tax deductions. For most people, the most apparent annual tax deductions of Rs 1.5 lakh under Section 80C and Rs 25,000 under Section 80D for those under the age of 60. At the same time, those who investing in National Pension System (NPS) can avail of an additional annual tax deduction of Rs 50,000 under Section 80CCD(1B). This facility is also available for another investment option for pension, Atal Pension Yojana.
Prima facie an extra tax deduction of Rs 50,000 should make many consider reaching out for NPS. Remember, after some recent changes in this investment option, you can withdraw as much 60% as a tax lump sum and the regular retirement income from the remaining 40% of the savings derived by buying annuities, is also tax free. Of course, the savings amount is Rs 2 lakh or less, the whole amount could be withdrawn on reaching age 60. At the same time, like all investments, NPS really works if it fits your financial requirements. After all, your investments shouldn’t just save tax but also contribute towards meeting your requirements. There are typically four conditions when this happens.
Extra tax savings required You get a large pay hike or a bonus and you also need to give your retirement savings effort a leg-up, the extra Rs 50,000 of investment would be worth the bother for this tax saving investment.
Lump sum requirement on retirement A relocation on retirement, touching up or modifications to your home for retired life, there could be many requirements for lump sum amounts on retirement. If you anticipate such needs, again NPS is appropriate since it provides tax free lump sum to the tune of 60% of your accumulations.
Anticipated regular retirement income When you retire, you will not have the comfort of getting a regular pay getting credited in your account at the beginning of every month. If you are looking for a retirement savings products that will also double up to provide regular retirement income, NPS becomes a good option. Of course, the tax deduction becomes the added advantage.
No need for liquidity in the interim The lock-in period of NPS is pretty substantial at 10 years. Even in such cases, you will be able to access 20% as lump sum and the rest will need to be converted into regular income through annuities. Thus, if you think that there will be no requirement—even emergency requirements—that will necessitate the partial or full premature withdrawals, NPS would fit the bill of your needs.
Clearly, you need to look beyond tax savings and consider the fit of NPS in your financial gameplan for meeting financial goals. It is only then that they will be worth marking the additional amount of eligible tax saving investments.
