Why early switching matters The National Pension System (NPS) aims to enable people to build a retirement corpus via long-term, disciplined investment. Most people postpone serious planning for retirement until their 50s, but opting for NPS much before 60 has a major benefit: it allows your investments to grow more over time. The longer the term, the greater will be the corpus at retirement.
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How NPS works for retirement planning NPS provides acceptances of contributions from salaried and self-employed employees, to be invested in a mix of equity, corporate bonds, and government securities. The returns are market-based and not fixed as in pension schemes. At maturity, tax-free withdrawal of maximum 60% of the corpus in lump sum is allowed with the remaining to be used for the purchase of an annuity yielding periodic income in old age.
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The tax benefits of early switching NPS contributions qualify under Section 80C (₹1.5 lakh) and another ₹50,000 under Section 80CCD(1B). NPS is thus among the most tax-efficient investment schemes available. Not only do investors save more tax year after year by switching early, they invest those savings as well, with the compounding effect over several years contributing to the ultimate retirement money bag.
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Compounding effect over long periods For example, a person who puts ₹5,000 every month in NPS at the age of 30 can build a corpus of more than ₹1.5 crore by 60, with an average return of 9%. Investing the same money, however, at 45 will perhaps get less than ₹50 lakh. This is why investing early in NPS can make such a huge difference. The secret is to give your money as many years as possible to grow.
Freedom in investment management NPS gives you freedom of choice between assets of equities, corporate debt, and government securities. You can opt for higher equity exposure to avail of the potential for growth by younger investors and then gradually switch to safer assets when retirement is approaching. This flexibility enables you to enjoy both growth and security if you switch earlier in life according to your changing risk attitude.
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What to keep in mind before switching Even though NPS has certain advantages, a planned approach is necessary. Partial withdrawals are allowed but only for certain purposes like education, marriage, or buying a house after a lock-in period. Further, systematic annuity purchase on maturity means a part of your corpus will be dedicated to regular payouts, which may not be desirable to everyone. However, these constraints are aimed towards retirement security.
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Building a safer retirement future Switching over to NPS before 60 is all about time being your biggest ally. The earlier you enroll, the larger your retirement corpus, thanks to tax benefits and compounding. For Indians generally ill-prepared for retirement, NPS offers an organized, government-backed, and flexible means of making arrangements for a safe financial life in advanced years.
