While many individuals turn to the NPS scheme to gain additional tax benefits of Rs 50,000 as per Section 80 CCD (1B), it offers much more. If you are looking for your money to grow steadily over time, solely focusing on NPS for tax breaks might not be the optimal strategy. NPS is tailored for those aiming for a secure retirement, whether employed by a private company or government. It contains a bundle of perks, including tax benefits and the potential for your invested funds to appreciate over the years owing to its association with the market.
The money you invest in the NPS scheme has the potential to yield favourable returns, transforming it into a reliable post-retirement income source. To fully leverage the benefits of NPS, it is pivotal to deliberate on where your investments should be allocated.
What are the investment choices offered by NPS?
Before you open NPS account, it is essential to be aware not just of the NPS account opening charges but also of the investment options offered by this scheme for managing your periodic investments. These include –
Active choice
In an active choice method, you are allowed to decide the amount you want to distribute as per specific limits. However, it is important to be aware that the PRFDA has now increased the upper limit for NPS to a maximum of 75 per cent without any gradual reduction condition starting from the age of 51.
Auto choice
If you do not want to make any asset allocation decisions, then this route is for you. This includes three options, which you may choose as per your preference –
Aggressive
Allocate up to 75 per cent of your investments to equities until 35, after which it decreases to 15 per cent by 55.
Moderate
Distribute up to 50 per cent of your investments in equities until 35, which later gets adjusted to 10 per cent by 55.
Conservative
Allocate up to 25 per cent of your investments to equities until 35, which tapers down to 5 per cent subsequently.
How to properly plan your NPS investment?
It is crucial to remember that the NPS scheme constitutes a portion of your retirement savings. Relying solely on it is not a prudent decision. Instead, besides investing in NPS, consider diversifying your investments across distinct options such as PPF (public provident fund), stocks, mutual funds, VPF (voluntary provident fund), FD (fixeddeposit), etc.
If you are below 40 years
Adopt a bold approach. Allocate maximum funds to equities when investing in an NPS subscription. However, if you are unsure about the apt amount to allocate in NPS to reach the preferred retirement corpus goal, then you may consider using an online NPS scheme calculator.
If you are in your mid-40s or beyond
Prioritise safer investment avenues such as FD, VPF and PPF and simultaneously in NPS invest a small amount in equities.
It is important to identify that these two are the general guidelines. Your unique circumstances might necessitate a different strategy. If you are uncertain and looking for guidance, then you may approach an investment advisor.