The National Pension Scheme (NPS) is designed to provide a sustainable and long-term solution for retirement planning, says Rahul Bhagat, CEO, DSP Pension Fund Managers.
In an interview with MintGenie, Bhagat said that NPS tackles the challenge of inflation by offering the option to invest in equities, which have historically delivered higher returns than fixed-income instruments over the long term.
Edited Excerpts:
How does NPS differ from other traditional retirement savings instruments?
Unlike traditional retirement savings instruments such as the Employees’ Provident Fund (EPF) or the Public Provident Fund (PPF), NPS offers greater flexibility and choice to investors. Subscribers can choose their asset allocation and investment options based on their risk appetite and investment goals. Additionally, NPS provides the option to invest in equities, which can potentially offer higher returns over the long term compared to traditional fixed-income instruments.
What are the advantages of investing in NPS over mutual funds or direct equity investments for retirement planning?
NPS offers several advantages over mutual funds or direct equity investments for retirement planning. NPS has EEE status and offers tax benefits at the time of investment, as well as during maturity and withdrawals, making it an attractive tax-saving instrument. NPS is also known for its lower charges compared to many mutual funds, making it a cost-effective option for long-term retirement planning. NPS is specifically designed to meet long-term retirement goals, with features such as regular pension payments and flexibility in withdrawal options.
How does the tax treatment of NPS differ from other investment options like fixed deposits, real estate, or insurance policies?
NPS offers unique tax benefits that distinguish it from other investment options. Contributions to NPS are eligible for tax deduction under Section 80CCD(1) of the Income Tax Act, up to a certain limit. An additional tax deduction of up to ₹50,000 is available for contributions to NPS under Section 80CCD(1B), over and above the limit specified under Section 80C. At the time of maturity, subscribers can withdraw a certain portion of the accumulated corpus (60%) tax-free, while the remaining amount is utilized to purchase an annuity, which is taxed as per the prevailing tax laws, whereas maturity proceeds of fixed deposits are taxable.
In what ways does NPS address the challenge of India’s ageing population and the need for retirement income security?
NPS addresses the challenge of India’s ageing population and the need for retirement income security in several ways. NPS encourages individuals to save regularly for their retirement years, ensuring financial security and independence in old age. NPS provides investors with the option to receive a regular pension income during retirement, thereby ensuring a steady stream of income post-retirement. By investing in a diversified portfolio that includes equities, NPS aims to beat inflation over the long term, ensuring that retirees maintain their purchasing power and standard of living.
How does NPS address the challenge of inflation and ensure that retirees maintain their purchasing power over the long term?
NPS addresses the challenge of inflation by offering the option to invest in equities, which historically have provided higher returns compared to fixed-income instruments over the long term. By allocating a portion of the investment portfolio to equities, NPS aims to generate inflation-beating returns, thereby, ensuring that retirees maintain their purchasing power and standard of living even in a high-inflation environment.
NPS is receiving good exposure now, but it has been in the system for 15 years. How do you see NPS growing as an investment avenue?
NPS has indeed gained momentum in recent years, thanks to various reforms and initiatives to promote retirement planning and financial inclusion. As awareness about the importance of retirement planning continues to grow, we expect NPS to emerge as a preferred investment avenue for individuals seeking long-term wealth accumulation and retirement income security. With ongoing efforts to enhance flexibility, transparency, and accessibility, NPS is well-positioned to attract a larger pool of investors and evolve as a mainstream retirement savings scheme in India.
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Published: 22 May 2024, 11:00 AM IST