Planning for retirement is an essential aspect of financial planning, and a growing number of investors today are realising the significance of making early investments to boost their retirement corpus. The National Pension Scheme is steadily gaining popularity among investors to meet their retirement needs.
However, many investors still do not fully understand what an NPS is and what are the NPS benefits in retirement planning and are unsure if they should subscribe to an NPS. If you, too, are contemplating subscribing to NPS, then this simple guide will help you get an understanding of the NPS.
What is NPS?
National Pension System (NPS) is a defined contribution pension-cum-investment scheme sponsored by the government. NPS was launched in the year 2004 in January exclusively for government employees except for those in the armed forces, but later on, in 2009 became opened to all to encourage systematic investment savings among citizens so that they can have a regular income at old age.
National Pension System is a voluntary investment option that is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is one of the cheapest market-linked retirement plans with a minimum contribution of Rs 6000 per annum. The investment can either be made as a lump sum or through minimum instalments of Rs 500 each month.
Features of the National Pension System
- NPS is portable across locations. So, it can be opened and operated from anywhere in India
- It is open to all Indian citizens, and the minimum entry age is 18 years, and the maximum age is 65 years.
- NPS account can be opened offline at any Point of Presence (POP) center with your KYC documents or online at enps.nsdl.com by linking your PAN card and Aadhaar number to your account
- In NPS, the savings of the investors are pooled together and invested in PFRDA-regulated funds managed by professional fund managers in various diversified portfolios. Investors can choose an asset mix of government bonds, equity instruments, corporate bonds, and alternative investments depending on their risk appetite.
- There are two phases in NPS-
1. NPS Accumulation Phase: This phase, you invest periodically during your working years to build the retirement corpus in a mix of asset classes depending on your risk appetite.
2. Retirement or NPS Annuity (Pension) Phase: This phase part of your corpus is used to provide you with a pension after your retirement in the form of annuity
- Investments in NPS can be managed in two ways-
1. Active choice- If you want to manage your funds actively
2. Auto choice- If you feel you lack the knowledge and expertise and allow a life-cycle based approach for fund management.
- NPS offers tax benefits to investors at the time of making contributions and even at maturity.
How does National Pension System work?
Once you open your NPS account, you are provided with a unique Permanent Retirement Account Number (PRAN), which remains valid throughout your lifetime. There are 2 tiers in the structuring of NPS.
Tier-I account- It is a permanent account. Thus, the accumulations made in this account are deposited and then invested according to the desired asset allocation as per the portfolio chosen by you. Withdrawals from NPS are not permitted. A total deduction of up to Rs. 2 lakhs can be claimed by investing in NPS under section 80C and 80CCD.
Tier-II account- It is a voluntary account, but you need to have an active Tier I account. You can make withdrawals from this account as and when you need it to meet any expenses.
1. NPS is a low-cost plan
NPS has an initial registration cost of Rs 200 and another Rs 40 to be paid for opening the account. Apart from this, you pay an annual account maintenance cost, which ranges from Rs 60 to Rs 95, and the value of each transaction is Rs 3.75. There is a nominal Pension Fund Manager (PFM) charge of 0.01% of the total AUM and custodian charges of 0.0032%.
2. NPS investments are managed by professional fund managers
One of the most significant NPS benefits is that it is managed by professional fund managers who have adequate knowledge and market expertise about markets and money management.
3. NPS is a highly regulated
NPS is regulated by the PFRDA (Pension Fund Regulatory and Development Authority) and all the investments are regularly monitored and reviewed by NPS trust.
4. Keeps the retirement corpus intact as it is difficult to exit
Even though NPS is a voluntary investment, the structure of NPS does not allow you to withdraw your corpus till you attain the age of 60. As the lock-in period is very rigid for the scheme, your retirement corpus is intact to meet your post-retirement requirements.
5. NPS tax savings for taxpayers is very useful in lowering their tax liability and enhancing returns
NPS tax savings make it very lucrative for the accumulation of retirement corpus. NPS entitles you to tax benefits at the time of investing, on the gains made during the tenure of your investment, and also at the time of withdrawal. In short, NPS offers EEE tax benefits. You can claim up to Rs 1.5 lakh in a financial year under Section 80C. Moreover, an additional deduction of Rs 50,000 can be claimed under Section 80CCD(1B).
The National Pension System is an ideal investment choice for your retirement planning as it will help you to make systematic investments and provide you with the desired income post-retirement. Get in touch with our experts at IndiaNivesh for more guidance and assistance for your NPS investments.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Every year, the income that you earn is subject to income tax. Calculation of your tax liability depends on the income tax slabs, which are determined under the Income Tax Act, 1961. These tax slabs specify the rates of tax payable on different levels of income. The higher the income you earn, the higher would be the income tax rate. However, before we understand the income tax slabs and calculation of your tax liability, let's look at the five sources of income that you need to declare when filing your income tax returns. Sources of income Income from salary Income from business or profession Income from capital gains Income from house property Income from other sources Any income that you earn in a financial year should be recorded under the correct head of income. After that, the total income is added together to find your gross taxable income. You can claim eligible deductions and exemptions from your gross taxable income to arrive at the net taxable income, which would then be subject to tax. Income tax slabs Now that you know how you are required to calculate your taxable income, here are the income tax slab rates which are applicable to calculate your tax liability – Income tax slab for individuals and HUF’s Points to note Here are some points which you should note concerning the above-mentioned income tax slabs In all the above-mentioned income tax slabs, there would be an additional health and education cess of 4% on the tax liability calculated. If your net taxable income is up to INR 5 lakhs, you can claim a rebate on the tax payable under Section 87A of the Income Tax Act, 1961. The rebate allowed would be your actual tax liability or INR 12,500, whichever is lower. This rebate reduces your tax liability to zero if your income is limited to INR 5 lakhs Illustration Let’s understand how to use the income tax slab for calculating your tax liability with the help of an example. Mr. Verma is 40 years of age, and he has an income of INR 10 lakhs from salary and INR 2 lakhs from other sources. He invests INR 1.5 lakhs in ELSS schemes and INR 20,000 towards a health insurance policy. His income tax liability would be calculated as follows – Calculation of Mr. Verma’s Taxable Income New Income Tax Slab In the Union Budget 2020, Mrs. Nirmala Sitharaman, India’s Finance Minister, introduced a new income tax slab. In this tax slab, the income tax rates are lower for higher levels of income. The new income tax slab is as follows – Income tax slab 2020-21 Points to note This slab would be applicable from the financial year 2020-21 Health and education cess of 4% would be applicable on the tax liability calculated using the above-mentioned income tax slab If you choose the new income tax slab rates, you would not be able to avail deductions and exemptions available under different sections of the Income Tax Act, 1961 Two deductions can be claimed under the new tax regime from your taxable income. The first deduction will be for your employer's contribution to the National Pension Scheme (NPS) if you are a salaried employee under Section 80 CCD (2). Contribution of up to 10% of your salary would be allowed as a deduction. The second deduction is under Section 80JJAA where expenses incurred on new employment would be allowed as an exemption. The income tax slab 2020-21 is optional. You can either choose the new tax slab or the old one for calculating your tax liability. The rebate under Section 87A would be allowed even under the new tax regime if taxable income is up to INR 5 lakhs Illustration In the above example, if the new tax regime is considered and the employer’s contribution to NPS scheme is INR 50,000, the taxable income and tax liability would be calculated as follows – Calculation of Mr. Verma’s Taxable Income (New Tax Slabs) As you can see, even in the absence of deductions, the new tax regime allows a lower tax liability due to lower tax rates. When you calculate your tax liability, use both income tax slabs, the old and the new, and find out your tax liability. Then choose the tax slab, which offers the lowest tax outgo and file your income tax returns. You can choose tax-deductible investments offered by IndiaNivesh and lower your tax liability using the old tax slabs. So, work out both the alternatives, if you need tax saving options, find them on IndiaNivesh and then file your returns. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
The Introductory Guide to Algo Trading India In today’s fast-moving world, technology has become an indispensable accessory of everyday life for most people, and investors are no exception. A growing number of investors today are exploring algorithmic trading for trading financial securities. What is Algo Trading? Algorithmic trading, also known as Algo trading, is automated buying and selling of shares in the stock market using intricate mathematical models and defined set of commands known as algorithms to carry out financial transactions at a high-speed. The instructions are programmed in the trading software as algorithms concerning specific variables like time, price, and volume, and the computer then executes the trade as per the instructions. Automation of trades helps investors perform specific financial strategies rapidly and precisely and, most importantly, free from human error, thus increasing the probability of success resulting in higher profits. Advantages of algorithmic trading: There are distinct benefits of Algo trading India as compared to traditional trading. The various benefits of algorithmic trading include- Speed: Algorithmic trading India accelerates the rate of the transaction as it can analyze many parameters and technical indicators at lightning-fast speed and execute the trade. Greater accuracy: The human intervention in Algo trading India is minimal, thus reducing the possibility of human error. Many a time, a trader can falter in punching orders or may analyze the technical indicators incorrectly, which is not the case in Algo trading due to automation, thus increasing the level of accuracy. Reduction in transaction costs: Algo trading India enables traders to execute multiple orders in a short time, thus reducing the transaction cost and increasing the overall profits. Minimization of human emotions: Algo trading strategies in India are pre-defined and formulated, thus keeping investor emotions at bay, which is one of the most significant advantages of algorithmic trading in India. As soon as the pre-required objectives are met, the execution of trade takes place automatically. As the psychological element is eliminated from the trade, so there is no room for deviation from the strategies. Diversification of trades: The use of algorithms and computers Algo trading enables investors to execute multiple trades and trading strategies at one time, which is not possible in case of manual transactions. So, trading opportunities over a range of markets and securities can be scanned and executed simultaneously. Thus, Algo trading in India allows investors to take benefit of diversification, which is difficult to attain in traditional trading. Disadvantages of Algo Trading Faulty algorithms can result in massive losses: As this strategy is entirely based on technology, the biggest drawback of algorithmic trading India is that the wrong algorithm can result in significant losses as many transactions take place simultaneously and any fault in the algorithm can be catastrophic. No control by humans: As the strategy is completely automated, there is minimal scope for discretionary choice for investors. Even if the investor realizes that a particular strategy may fail, he cannot abandon the program or stop the execution. Types of Algorithmic strategies After understanding what is algo trading, one needs to know the different types of algo trading strategies India. Let us look at some of the most popular Algo trading strategies used by institutional and retail investors- Momentum/Trend Following: Trend following is one of the most popular used algorithmic trading India strategies. This strategy involves finding a trend in the price of security using different indicators to analyze the available information. The trades use technical analysis charts and patterns to execute them. Technical indicators like moving averages, oscillators and price movements form the basis of analysis, and buying and selling of securities take place automatically when pre-defined conditions are satisfied based on the technical indicators. Simplicity and relative ease of design make it one of the most widely used algo trading strategies amongst traders. Arbitrage Strategy: An arbitrage opportunity is created when there is a difference in the price of the security on different exchanges on which it is traded. This Algo strategy uses computers to identify arbitrage opportunities and create risk-free profits as quickly as possible and uses them for profits. If a security price is listed on more than one exchange and its price is lower on one and higher on the other, then the algorithm identifies the different pricing and buys on the exchange with lower price and sells on the exchange with a higher price. Speed and accuracy are of paramount importance for this strategy and hence it is more efficient in comparison to manual trading. Statistical Arbitrage Strategy: It is a short-term trading strategy and it tries to make profits from opportunities that arise due to price inefficiencies and misquoting of price. The complex mathematical algorithms help discover the price inefficiencies swiftly and execute the trade before price correction, which is tough for investors to analyze on their own. Mean Reversion Strategy: Also known as a reversal strategy, it is based on the fact that the price of a security will move up or down but eventually come back to an average value at some point. The average price is calculated based on the historical data, and the strategy finds out the lower and higher price limit for stock and executes orders when they are beyond the range. This strategy works when there is extreme movement in prices, and the unexpected swings generate profit for the investor. Conclusion Algorithmic trading has immense potential, and the benefits of this strategy are yet to be fully explored by retail investors. Brokers like IndiaNivesh provide valuable market data to traders and the right platform and tools to build on their algorithmic trading strategies. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Are you Investment ready?
*All fields are mandatory