Why NPS is one of the Best Tax Saving Investments Options?

As you search for the most effective tax-saving investment avenues, take a moment to learn about the National Pension System (NPS). Originally designed to foster a culture of saving for retirement among Indians, the NPS is a pension and investment scheme with tax-saving benefits. 

It is a government-backed retirement savings plan that lets you make investments in a mix of assets such as equities, corporate bonds, and government securities. 

Read to learn why NPS for tax saving is one of the best investment tools to include in your financial plan. 

Tax benefits of investing in NPS

NPS not only offers attractive returns but also tax benefits, making it an excellent tool to grow your wealth over time while minimizing your tax liability. Contributions to NPS are deductible under Section 80C of the Income Tax Act up to a limit of Rs. 1.5 lakh. 

Additionally, NPS subscribers can claim additional tax deductions of up to Rs. 50,000 under Section 80CCD (1B), which is over and above the limit of Rs. 1.5 lakh under Section 80C. This makes NPS for tax saving a compelling option if you are looking to reduce your tax liability.

Why invest in NPS?

Apart from the evident national pension scheme tax saving benefits, there are several reasons why investing in NPS can be a wise decision:

1. Flexible investment options

NPS gives borrowers the flexibility choose between two accounts, catering to their diverse risk appetites and financial goals. These are: 

a. Tier 1 Account: Where your funds are stored with the purpose of building a retirement corpus. 

b. Tier 2 Account: A voluntary account that allows for easier access to funds but doesn’t offer any tax benefits. 

There are also four asset classes among which you can choose to distribute your investments: 

a. Asset Class E- Equity Market

b. Asset Class C- Corporate Bonds

c. Asset Class G- Government Bonds

d. Asset Class A- Alternative Investments

2. Market-linked returns

What sets NPS apart from traditional pension plans is its ability to offer returns that are tied to the market's performance. Your contributions are managed by seasoned fund managers who aim to grow your retirement fund by tapping into the potential of the market.

3. Regulated investment option

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). This regulatory body ensures transparency, reliability, and the security of your investments and keeps your funds safe. 

4. Mandatory annuity purchase

Upon reaching the milestone of 60 years, NPS provides a balanced approach to retirement by allowing you to withdraw up to 60% of your savings corpus. The remaining 40%, however, is used to purchase an annuity plan. This compulsory annuity investment guarantees you a steady income stream in your retirement years.

Final thoughts

NPS offers a blend of flexibility, market-linked returns, and tax benefits. This makes it an excellent option if you are looking to optimise your retirement savings and reduce tax liability. It's a smart way to plan your finances and secure your future. 

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