NPS: 5 Key Points For Effective Retirement Planning

Retirement planning requires careful consideration of various options and informed decision-making to secure your old age financially. Know more.

Meghna Maiti
May 15, 2023
NPS: 5 Key Points For Effective Retirement Planning

Planning for retirement is crucial to ensure financial security and peace of mind during your golden years. One tool that has gained significant popularity in recent years is the National Pension System (NPS). 



Here are five critical things you need to know about NPS to make informed decisions and maximize your retirement savings.


What Is NPS? The NPS is a government-backed pension scheme introduced in 2004 for Indian citizens. It is a defined contribution retirement savings scheme designed to provide individuals with a reliable source of income during their retirement years. NPS aims to encourage systematic and regular investment in pension funds and offers attractive tax benefits to investors.


Flexibility & Control: One of the key advantages of NPS is its flexibility and control. As an investor, you can choose your investment options and fund managers and allocate your funds accordingly. NPS offers two investment choices: auto choice and active choice. Auto choice automatically adjusts the asset allocation based on age, while the active option allows you to manage your investment portfolio.


Tax Benefits: NPS provides significant tax benefits, making it an attractive retirement savings option. Under Section 80C of the Income Tax Act, investors can claim a deduction of up to Rs 1.5 lakh on their contributions to the NPS. Additionally, an exclusive deduction of up to Rs 50,000 is available under Section 80CCD(1B). These tax benefits help reduce your taxable income and provide substantial savings in the long run.


Annuity Options: Upon reaching 60, NPS investors must utilize a portion of their accumulated corpus to purchase an annuity. An annuity is a financial product that offers a regular income stream during retirement. NPS provides different annuity options, including lifetime annuity, with or without a spouse’s benefit, and return of purchase price options. It is crucial to understand the annuity choices available and select the one that suits your requirements.


Exit and Withdrawal Rules: While NPS is primarily a retirement-focused investment, it offers flexibility regarding exit and withdrawal. Upon reaching 60, investors can withdraw up to 60 per cent of their accumulated corpus as a lump sum, tax-free. The remaining 40 per cent must be used to purchase an annuity. However, if an investor wishes to exit NPS before age 60, only 20 per cent of the accumulated corpus can be withdrawn, and the remaining 80 per cent must be used to purchase an annuity.


The NPS is an essential tool for retirement planning, offering flexibility, control, and attractive tax benefits. By understanding these five critical aspects of NPS, you can make informed decisions and ensure a financially secure retirement. Consult with a financial advisor to assess your needs and goals, and start investing in NPS to build a robust retirement corpus. Remember, early planning and regular contributions can go a long way in securing a comfortable retirement lifestyle.

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The National Pension System (NPS) has grown in popularity in recent times among all types of investors. Its most attractive features include tax deductions, inculcating investment discipline, etc.

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