5 Reasons Why You Should Include NPS In Your Tax Planning At Early Stage Of Your Life

1. Additional tax deduction of up to Rs 50,000 per year

Investment in NPS qualifies for an additional tax deduction of Rs 50,000 under Section 80CCD of the Income Tax Act, 1961. Consider this tax break as an "additional investment" in your retirement fund. In that scenario, this additional investment over the following 25 to 30 years might make a significant impact on your retirement fund. Another way to look at it is that the tax savings improve your take-home pay while also allowing you to invest in additional tax-saving opportunities.

2. Your money will be tax-free when it reaches maturity

As an NPS investor you can take 60% of the corpus tax-free at maturity, according to current tax laws. You must purchase an annuity for the remaining 40%; however, there is no tax due at the time of purchase. As a result, the withdrawal is tax-free in its entirety.

You will only be taxed on the monthly annuity payments you receive. Even this income would be subject to the base tax exemption limit, meaning that only a part of it would be subject to taxation.

Over time, the government has made NPS taxation regulations more investor-friendly and appealing. This tax treatment puts NPS on par with PPF and EPF, making it an appealing investment for a young investor.

3. Low cost and highly regulated investment

Fund management fees in schemes such as equity-linked savings schemes (ELSS) and Unit-Linked Insurance Plan (ULIP) range anywhere from 1% to 2%. Whereas, in comparison, NPS fees are at 0.01 per cent of Asset Under Management (AUM). In addition, the regulatory agency PFRDA actively regulates and monitors NPS. This implies that your rights and interests are safeguarded at all times. Given the long-term nature of investment and the vital importance of the financial objective for which you're saving your hard-earned money, this is critical.

4. Multiple fund management & asset allocation options

NPS allows you to pick from a variety of fund managers and fund allocation options. When it comes to fund manager selection, you may rapidly look into each fund's prior performance to assist you in making your decision. Even once you've invested, it's simple to swap funds online in the middle if you see a dip in performance.

You have the option of choosing between active and automatic asset allocation when it comes to fund allocation. If you are a knowledgeable investor who understands how markets function, you may plan an equity allocation of up to 75 per cent. If you're a passive investor, though, auto allocation will automatically balance your asset allocation based on your age.

5. The long lock-in period turns NPS into a smart retirement investment

As a young investor, it may be difficult to consider retirement or think about it, but this attitude may jeopardise your retirement age and corpus. Let's understand this, suppose you start your retirement investment in your early 40s, doing this you will miss out on the power of compounding. 

The later you start saving for retirement, the more money you'll need to put aside each month, which makes it not good for you and your savings. NPS is a great way to compound your money, unlike other investments, the money you put into it is locked in until you reach the age of 60.

This may appear to be a disadvantage for you as a young investor but it's not. But how? Lock-in period protects you from being tempted to spend your hard-earned retirement money on frivolous items and other expenses, which can be avoided.