What and How Questions on National Pension Scheme (S1E12)

Here is a set of questions and answers on National pension scheme explaining the what and how of NPS, long term investment in it as well as tax savings

—Podcast Transcript—

Hey Guys!

Welcome to the 12th Episode of the Little Saves Podcast on Personal Finance. A few weeks back I wrote about the NPS Tax Exemptions and what it means for you. After that I got a few questions from readers on how NPS works and asking for more details.

My earlier article was just to show case the tax benefits. So, on today’s podcast let me talk about a few of the questions that were raised around the National Pension Scheme and the benefits of investing in it for someone on FIRE!

How can I open a national pension scheme?

The quick and easy way to open an account under the National Pension Scheme is to visit your Bank. Most large banks such as ICICI, Axis, SBI, HDFC allow customers to open an NPS account with them. Alternately, you can open an account with a third party provider such as ET Money who allow you to manage your NPS account on their app.

How can I get tax benefit from NPS?

There are two major benefits for investing in NPS. 1.) You get a tax break on the money invested in NPS up to a limit of Rs.2 lakhs. 2.) You get great returns on your investment that make the national pension scheme a great long term investment option.

How much pension I will get from NPS?

This depends on how much money you invest and for how long. If you start investing Rs.5000 every month from the age of 20, then when you reach the age of 60, you would have accumulated a corpus of Rs.1 Crore 75 lakhs assuming returns of 8%. If you choose to withdraw 60% of this then your monthly Pension will be Rs.35,000. If you do not withdraw this money and choose to get annuity from the full amount, you will get a pension of Rs. 87,800 per month.

How much should I invest in NPS for tax benefit?

This depends on two factors, 1.) How much pension and corpus do you want to build for your retirement period. 2.) How much do you save in terms of tax. In my case, I save Rs.50,000 every year under NPS as I have utilized my Sec 80C limits to the max. Hence, I save money in NPS just for the tax break it offers under sec 80CCD.

How much tax does NPS save?

NPS can help you save upto Rs.62,400 per year in taxes. This is assuming you are in the 30% tax bracket and are not utilizing Sec 80C.

Is contribution to NPS tax free?

Yes, contributions up to Rs.2,00,000 can be tax free depending on your tax slab and other factors such as utilization of tax benefits under section 80C.

Is it worth to invest in NPS? Should I invest in NPS to save tax?

Yes, absolutely. NPS offers one of the best returns when compared to mutual funds, PPF,EPF and other long term investment savings. Plus, with the tax benefit, you may get a lot more for your investment.

Is NPS allowed in new tax regime?

Under the new tax regime, contributions by you to NPS is taxable. What will remain tax free are employer’s contribution to NPS as well as the lump sum you withdraw on maturity. You need not pay tax on these two.

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Abhi is a 29 yr old Indian, on FIRE to retire by 40. He has been investing and learning Finance for the past 12 years. After completing Mechanical engineering, he started working in a multi-national Bank and grew to become an AVP. Currently with an IT MNC as a VP. He lives in Bangalore with his wife and their 1 year old daughter. In his free time, Abhi loves to game on the Xbox, watch movies, read and blog.

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