Every taxpayer in the country has a common goal- to save on taxes and increase income. One can do so by opting for several tax-saving investments offered by the financial institutions of the country.
If planned beforehand, the investments can compound, and taxpayers can save on tax.
For instance, the National Pension Scheme or NPS offers a return of around 12% to 14% after the lock-in period. At the same time, it also allows you to save on taxes.
Saving For Retirement
While saving on tax is an immediate need, you should also start saving to ensure a relaxed retired life.
While there is no such rule of thumb that how much you should save for a secured retired life, most people rely on the 30:30:30:10 rule. It means 30% as an inheritance for children, 30% to safeguard you from inflation, 30% to spend and live the retired life comfortably and the rest 10% is for an emergency.
However, the asset allocation also needs to be wise. For instance, the first 30% can be in equity, another 30% can be in hybrid (equity and debt), the next 30% could be in income-bearing debt, and the rest 10% should be as a liquid asset.
To streamline the savings for retirement, you need to choose the right avenues from the early years of your income. Remember to opt for investment products that are retirement-friendly and offer tax benefits.
Investment Options for Retirements
Choosing the right investment products is crucial to accrued considerable sum post your retirement. Following are some of the options you can consider depending on your financial goals, like to save tax or grow wealth or both
The Government of India offers this savings scheme for retirement planning. The PPF accounts come under section 80C of the Income Tax Act, 1961.
It allows you to save up to Rs. 46,800 annually on tax. There is a cap on annual investment of Rs.1,50,000, and it comes with a lock-in period of 15 years.
Thus, if you are looking for long term returns while enjoying tax benefits, this scheme will be a good choice.
The private sector employees looking for pension plans can invest in mutual funds. The returns on mutual fund investments are quite high, nearly 12% to 15% a year.
While you can invest in mutual funds for a long-term and short-term financial goal, long-term investment will be beneficial if you plan for retirement. It will compound, and you can grow your wealth. It will be wiser if you can invest in equity products in the initial days and shift to debt funds as retirement age approaches. This investment will ensure a lump sum when you retire.
NPS or National Pension Scheme is a Government-backed retirement savings plan. The National Pension System was introduced to ensure social and financial security forthe Indian working population.
Employees from the public, private or government-both state and central, are eligible for the NPS scheme. The NPS eligibility criteria is less stringent compared to most Government pension schemes. Anybody between 18 and 65 can contribute to this pension account at regular intervals.
After holding this account for at least 10 years, you can withdraw a certain amount from the corpus. After retirement, you can withdraw 60% of the whole corpus and the rest you can get as an annuity plan.
NPS is a long-term investment that provides a lot of flexibility. For instance, you can invest in government, equity and corporate funds. The equity allocation can be up to 75% of total assets until 50.
But, if you are still thinking, why invest in NPS? Do not forget about the tax benefits this scheme offers.
Tax Benefits under National Pension Scheme (NPS)
Remember that you can only claim income tax deductions against your NPS investments if it is a Tier-1 account.
You can claim the deductions under the following sections:
Additionally, if your employer contributes 10% of your (basic salary and DA), that amount will be tax exempted. Let’s understand it with an example.
Suppose an NPS subscriber earns Rs. 5 lakhs as basic salary and Rs.3 lakhs as DA or ‘Dearness Allowance’. He can claim a tax benefit of Rs.80000 (10% of basic salary+DA) throughthe employer’s contribution. He can enjoy additional tax deductions under sections 80C and 80CCD(1B).
Therefore, in total, he can claim tax deductions of up to Rs.2.8 lakh in a year.
Hence, it is pretty much clear that NPS can be an ideal income tax saving product that you can include in your financial plan.