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  • What are the Common Myths About the Tax Benefits of NPS?

    What are the Common Myths About the Tax Benefits of NPS?

    The National Pension System (NPS) is a retirement savings instrument that offers attractive tax benefits to encourage people to save for their golden years. However, there are many myths surrounding the actual tax benefits you can avail of with NPS. This confuses and stops people from availing of a financially beneficial offering. In this article, we will bust some common myths about the tax perks of investing in NPS. Understanding the realities will help you make an informed decision about using NPS as a tax-saving tool.

    Myth 1: NPS Tax Benefits are Just Like Other Investments

    NPS offers additional, exclusive tax benefits that most other tax-saving investments do not. Under Section 80C, you can claim a deduction up to ₹1.5 lakhs for NPS contributions, just like other options such as PPF, ELSS, etc. However, NPS offers further deductions:

    ●    Section 80CCD(1B): An extra ₹50,000 deduction, over and above the 80C limit  
    ●    Section 80CCD(2): Up to 14% (new regime) is deductible from employer contributions

    This is a key difference from other tax-saving investments. Under 80CCD(2), employer NPS contributions up to 14% of basic pay become deductible from taxable salary. No other investment gives salaried individuals this triple tax benefit—80C, 80CCD(1B) and 80CCD(2).

    Myth 2: NPS Withdrawals are Fully Taxable

    At age 18, the child’s NPS account transitions to a standard NPS account. At exit (typically age 60), up to 60% of the corpus can be withdrawn tax-free as a lump sum, while at least 40% must be used to purchase an annuity, the income from which is taxable. If the corpus is below ₹2.5 lakh, it can be fully withdrawn tax-free.

    Compare this to PPF, EPF or VPF, where your accumulations and withdrawals are tax-free only until you retire. Post retirement, interest earnings exceeding ₹50,000 per annum are subject to tax. NPS scores over other retirement schemes here by making 60% of the corpus tax-free irrespective of the holding period or quantum withdrawn.

    Myth 3: You Lose Tax Benefits if You Exit Early

    This myth stems from partial knowledge. While an early NPS exit does limit the lump sum withdrawal percentage, it does not take back the tax benefits already availed on contributions. For instance, exiting before 60 years only allows withdrawals up to 20% of the corpus instead of 60%. However, all contributions for which you claimed tax deductions will not be added to your income in the year of withdrawal.

    The taxman may not ask you to return or nullify deductions enjoyed in previous years. The only impact is that your withdrawals get restricted if you exit before the maturity period of 60 years. So, while early exit impacts liquidity, it does not reverse previously claimed NPS tax benefits.

    Myth 4: NPS Benefits Only High-Income Groups

    NPS tax benefits are meant for all individuals who pay income tax, irrespective of their salary brackets. For instance, even fixed-income senior citizens can open an NPS account and reduce their tax outgo by ₹50,000 through section 80CCD(1B) deductions.

    Similarly, employees across MNCs and SMEs – from blue to white collar roles – can claim NPS tax benefits under 80CCD(2) on employer contributions. The only criterion is that you should have some tax liability to offset through these deductions. So while HNIs may gain more in absolute rupee terms, NPS tax advantages are very much relevant for middle-income groups too.

    Myth 5: Lock-in Defeats Flexibility for Tax Planning

    NPS indeed comes with longer lock-in requirements than ELSS, PPF, or ULIPs. However, one must evaluate this from a retirement planning perspective. NPS aims to create a pension corpus and hence, places withdrawal limits. However, this does not make it inflexible.

    NPS allows partial withdrawals of up to 25% of own contributions before maturity for specific expenses like children’s education/marriage, or buying residential property. You can plan your withdrawals for these crucial life goals. Additionally, you can withdraw the entire corpus if you are diagnosed with any specified critical illness.

    So, while NPS discourages random withdrawals, it does account for critical liquidity needs. Partial withdrawals can be used for tax planning while the rest of the corpus remains invested for retirement.

    Conclusion

    NPS is fundamentally meant for retirement planning, not just tax savings. The lock-in period and withdrawal rules promote disciplined long-term investing. At the same time, exclusive tax benefits make NPS very attractive. Instead of getting swayed by superficial myths, evaluate NPS objectively for its dual advantage – tax efficiency coupled with wealth creation for your golden years. Use it strategically along with other tax-saving options to maximise deductions and secure your financial future.

    FAQs

    1. Is it good to invest in NPS for tax benefits?  
    Yes, NPS is great for tax savings. Under Sections 80CCD(1) and 80CCD(1B), you can save up to ₹2 lakh, plus extra deductions for employer contributions under Section 80CCD(2).

    2. Is NPS 100% tax-free?  
    No, NPS is not fully tax-free. After age 60, 60% of your withdrawal is tax-free, but the remaining 40% used for annuity payments is taxed based on your income slab.

    3. Can I claim both 80C and 80CCD?  
    Yes, you can claim both. Section 80CCD(1) is part of the ₹1.5 lakh 80C limit, but Section 80CCD(1B) gives an extra ₹50,000 deduction, and 80CCD(2) covers employer contributions.

    4. Can I exit from NPS after 1 year?  
    Yes, you can exit early, but there are restrictions on how much you can withdraw. Staying longer helps your money grow and keeps your tax benefits intact.

    5. What happens to 40% of the NPS amount after death?  
    If you pass away, your nominee can withdraw the entire NPS corpus, including the 40% annuity portion, as a lump sum, tax-free, or use it to buy an annuity.  
     

  • Mutual Fund vs PPF: Which One Should You Choose?

    Mutual Fund vs PPF: Which One Should You Choose?

    When it comes to investing funds in India, two of the most popular options are Mutual Funds and the Public Provident Fund (PPF). Both are widely used by individuals with different financial goals. While some investors prefer the safety of assured gains, others look for higher returns even if it means taking some risks. PPF and Mutual Funds offer benefits like tax savings, long-term wealth creation, and flexible investment options. However, they differ in key aspects, such as risk, returns, and duration. This article explains what PPF and Mutual Funds are, their differences, and which might suit your needs better.

    What is a Mutual Fund?

    A Mutual fund is a type of investment managed by professional fund managers at Asset Management Companies (AMCs). These funds collect capital from many investors and invest it in a variety of financial assets such as shares, bonds, and government securities. Mutual funds are available in different types, like equity funds, debt funds, and hybrid funds. Each type comes with its level of risk versus return potential, allowing investors to choose a fund that matches their financial goals and risk appetite.

    Since mutual funds are market-linked investments, they do not guarantee returns. However, with regular investments over a long period, especially through a Systematic Investment Plan (SIP), they have the potential to deliver appropriate returns. SIPs also make investing more disciplined and manageable. You can use a mutual fund SIP calculator to estimate how much your funds might grow over time based on your monthly investment and the expected rate of return.

    What is PPF?

    The Public Provident Fund (PPF) is a government-backed long-term savings scheme designed to encourage small savings while offering assured returns. It provides a fixed rate of interest, which is reviewed periodically by the central government. The interest earned on the investment is compounded annually and is tax-free, making PPF a popular choice among conservative investors seeking a safe and steady return.

    A PPF account comes with a mandatory lock-in period, making it ideal for long-term financial goals like retirement planning. Contributions made to a PPF account are also eligible for tax deductions under the Income Tax Act. For better planning, you can use a Public Provident Fund calculator to estimate the future value of your investment based on your annual contributions and the prevailing interest rate.

    Key Differences Between Mutual Fund and PPF

    Here are the key differences between mutual funds and a PPF:

    1. Risk: PPF is a low-risk investment since it is backed by the government and offers fixed returns. Mutual funds, on the other hand, involve market risk. Their value depends on how the stock and bond markets perform.

    2. Returns: PPF currently offers around 7–8% annual interest, which is reviewed quarterly by the government. Mutual Funds can offer higher returns—equity funds may give 10–15% annually—but these returns are not fixed and may vary depending on market performance.

    3. Investment Duration: PPF has a lock-in period of 15 years, making it suitable for long-term goals. You can extend it in blocks of 5 years after maturity. Mutual funds offer more flexibility. You can invest for a few months or several years, depending on your goals.

    4. Liquidity: PPF is less liquid due to its long lock-in. Partial withdrawals are allowed only after a certain year. Mutual funds offer high liquidity, as most types can be redeemed anytime, though tax and exit loads may apply.

    5. Tax Benefits: Both PPF and tax-saving mutual funds (ELSS) qualify for deductions under Section 80C. However, while PPF interest and maturity amount are tax-free, ELSS gains above ₹1 lakh annually are taxed at 10%.

    6. Diversification: PPF invests mainly in fixed-income instruments. Mutual funds offer greater portfolio diversification across various sectors and asset classes, which can reduce overall investment risk.

    What Should You Choose?

    Choosing between PPF and mutual funds depends on your financial goals and risk appetite. If you are a conservative investor looking for assured returns and long-term savings with tax benefits, PPF may be a great choice. It offers stability, safety, and tax-free returns. However, if you are willing to take some risk in exchange for the possibility of higher returns, mutual funds, especially equity funds, can be more rewarding over time. They also give you the flexibility to invest for short or long durations. Many investors choose a combination of both to balance risk and reward in their investment portfolio.

    Conclusion

    PPF and mutual funds are both useful investment options with different advantages. While PPF provides a safe and secure way to build a retirement corpus, mutual funds offer the opportunity for higher returns with market-linked growth. The choice depends on your risk profile, time horizon, and financial goals. Beginners and risk-averse investors may prefer PPF, while those with a higher risk tolerance and long-term goals can consider mutual funds. Ideally, diversifying across both options can help you build a balanced and well-performing investment portfolio for the future. 
     

  • Retirement Planning- The Basics that you need to keep in mind

    Retirement Planning- The Basics that you need to keep in mind

    Retirement planning is extremely important for every individual, irrespective of their career trajectory and financial background. A solid retirement plan is a must to get you through the twilight years without any compromises or financial hurdles. What comes to your mind when you consider the term retirement planning? This is basically the process where you work out your income based goals after retirement and the current steps required for achieving the same.

    Working out the right retirement plan involves first zeroing in on income sources, forecasting future expenditure, sticking to a plan for increasing savings and also the management of risks and assets. The best retirement plans are those which cover future needs including medical care, emergency funds, post-retirement goals like buying a house or taking a vacation and also monthly expenses for the rest of one’s lifetime. You can start planning for retirement at any time in your career but as they say, the earlier the better!

    Delving deeper into retirement planning

    There are several types of retirement plans that are at your fingertips. You should always invest wisely in future retirement schemes, having clear information about the investment channel/avenue, the returns to be expected, market risks and the amount to be invested periodically among other factors. You should carefully plan the corpus that you wish to build for your post-retirement years. This should encompass all your lifestyle preferences including buying property, taking holidays every year, eating out, buying gadgets/appliances, buying something for your children/grand-children, investing in your children’s future, weddings, medical emergencies and so on.

    Putting aside ample funds for the post-retirement years is of crucial importance. You should start investing as early as possible to reap the benefits later on. Planning for retirement should start long before your actual retirement. You should have a proper number in mind after thoroughly analyzing your future needs and also taking future inflation rates into account. Many people say that you require at least Rs. 1-2 crore to enjoy a comfortable retirement. Some say that you should accumulate enough money to sustain yourself on 80% of your monthly income post retirement. Suppose you earn Rs. 12 lakh annually and hence you should be able to sustain yourself on Rs. 9.6 lakh every year. This works out to around Rs. 1.92 crore or roughly Rs. 2 crore for a period of 20 years. Consult financial experts to work out how much you should be saving for retirement.

    Stages of planning your retirement

    There are several stages of life when you should be planning for retirement by investing as per your budget. Here are the key retirement planning stages.

    ●    21-35 years of age- This is the time when probably building a retirement plan or corpus will not be on your mind. However, you should remember that the earlier you start, the more you will benefit from the power of compounding. At this early professional and personal stage, you will have more money to be invested. Compound interest will enable interest earnings on top of interest and the more years you keep at it, the more will be your accumulated savings. Suppose you invest just Rs. 5,000 every month at the age of 25 when you start working. This will be worth at least 3-4 times more if you invest it at this young age rather than if you start investing at the age of 50 or so. This is the power of compounding interest. Check out the right mutual funds or stocks for investments and stay invested for a long time period. This will help you create wealth considerably. Try and invest at least 20-30% of your monthly income for your retirement. Contribute at least the amount deducted by your employer by way of PF.
     
    ●    36-50 years of age- This is the time when your income goes higher but expenses mount as well including the cost of starting a family, repaying higher education debt, home loans, weddings, children’s expenses, car loans and so on. Yet, you should continue saving for retirement. Maintain your original systematic investment plans or other mutual fund investments. Make sure that you and your family are insured both for life and health. Also try and utilize bonuses or surplus funds for investments.

    ●    50-60 years of age- This is the time when your income is at its peak and you have possibly managed to cover a lot of your debt and other liabilities. This is when you should invest all your surplus monthly income into aggressive investments for beefing up your retirement corpus. You already have your home and insurance investments ready. You can now diversify into other mutual funds and stocks, particularly of blue-chip companies if you desire. You can take a few risks, i.e. by investing in high-return funds which are subject to market volatility. This is the decade when you make up in terms of your overall savings.

    Why mutual funds or stocks?

    You should consider mutual funds or stocks for investments tailored to serve you well after your retirement. You must already know that conventional means of investments like bank deposits, real estate and PPF among others, are either constrained by falling rates that will not outstrip inflation or come with long lock-in periods or even liquidity issues. As a result, while you should always have a diversified portfolio with some real estate, some insurance and some conventional investment allocations, remember that to beat inflation, you should carefully invest in stocks and mutual funds. These are avenues which can give you good returns that easily surpass inflation.

    However, you have to stay invested for the long haul and should be ready to suffer minor market blips in the course of time. Be patient and let the corpus accumulate over a period of time. Additionally, do your research and choose the best funds for investments. Always consult the experts like Groww which helps you plan and manage your investments to perfection. The transparent and user-friendly investment platform will enable steady wealth creation for retirement along with all the advice and inputs that you require from expert professionals. Here’s to a healthy retirement kitty!