Five reasons why you should incorporate NPS into your life's early tax planning

A excellent time to invest in retirement plans or schemes is when you have just begun to make money in life. You will need to make prudent investments, though, if you want to amass a sizeable corpus that will last you your entire life. For this, there are several investing options available, and which one you select will depend on your current age and income profile. You can enroll in the National Pension Scheme if you are young and have plenty of time to save for retirement (NPS). But why should you invest in NPS, exactly? What qualifies NPS as a wise retirement investment?

The top 5 causes for young investors to start investing in NPS now are as follows:

1. A higher annual tax deduction of up to Rs. 50,000 Under Section 80CCD of the Income Tax Act of 1961, investments in NPS are eligible for an extra tax deduction of Rs 50,000. Consider this tax benefit as a "bonus investment" in your retirement account. In that case, this additional investment could have a considerable impact on your retirement fund during the ensuing 25 to 30 years. Another way to look at it is that the tax savings increase your take-home pay and enable you to invest in more possibilities to reduce your taxes.

2. When your money reaches maturity, it won't be subject to taxes. According to existing tax legislation, NPS investors are permitted to withdraw 60% of the corpus tax-free at maturity. There is no tax owed at the time of purchase, but you must buy an annuity to cover the remaining 40%. As a result, the entire withdrawal is tax-free. Only the monthly annuity payments you receive will be subject to tax. Even this income would be limited by the basic tax exemption amount, so only a portion of it would be taxed. Government NPS taxation regulations have become increasingly enticing to investors over time. With the same tax treatment as PPF and EPF, NPS is a competitive investment for a young investor.

3. Investments with low costs and strict regulations In programmes like equity-linked savings schemes (ELSS) and unit-linked insurance plans (ULIP), fund management fees can range from 1 percent to 2 percent. NPS fees, in contrast, are 0.01 percent of the asset under management (AUM). The regulatory body PFRDA also actively regulates and oversees NPS. This suggests that your rights and interests are always protected. This is crucial due to the long-term nature of investments and the critical significance of the financial goal for which you're investing your hard-earned money.

4. A variety of alternatives for asset allocation and fund management You can choose from a range of fund managers and fund allocation options with NPS. If you're choosing a fund manager, you can quickly review the past performance of each fund to help you decide. If you see a decline in performance after investing, it is simple to switch funds online in the middle. When it comes to fund allocation, you can select between active and automatic asset allocation. Planning an equity allocation of up to 75% is possible if you are an informed investor who is familiar with how markets work. However, auto allocation will automatically balance your asset allocation based on your age if you are a passive investor.

5. NPS becomes a wise retirement investment due to the lengthy lock-in period. Young investors may find it challenging to think about or even consider retirement, yet this mindset could jeopardise their retirement age and corpus. Let's get this straight: if you start saving for retirement in your early 40s, you will lose out on the power of compounding. The more money you'll need to set away each month the later you start saving for retirement, which is bad for both you and your savings. Unlike other investments, the money you invest in NPS is locked in until you turn 60, making it a wonderful method to multiply your funds. Although it can seem like a disadvantage for you as a new investor, it is not. Yet how? The lock-in period guards you against the temptation to spend your arduously saved retirement funds on unnecessary spending and frivolous products.