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4 Reasons to Invest in NPS

National Pension System (NPS)
Launched by the Government in 2004 and opened to the public in 2009, NPS is a voluntary retirement scheme. By investing in it, you can create a retirement corpus and also get a monthly pension for life after retirement.

It is regulated by Pension Fund Regulatory Development Authority or PFRDA, and any Indian national between the age of 18 and 65 can join it. 

Since it’s a retirement scheme, an investor can’t redeem his money before the age of 60. However, partial withdrawal is allowed in specific needs like children’s education.

Now let’s look at its tax benefit:
You can claim a deduction against your NPS investment only for investments done in Tier 1 account, so while investing do take care of this.

The Tax Benefits under Section 80CCD (1B)
This is an additional tax benefit given only to NPS investors. Under this section, you can claim tax deductions for your investments up to Rs 50, 0000. This is over and above the deduction that you can claim under Section 80C.

So, you can claim tax deduction up to Rs 2 lakh simply by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs 50,000 under Section 80CCD (1B). That means if you fall under the tax bracket of 30 percent, you can save Rs 62,400 in taxes.

The Tax Benefits under Section 80C
NPS is one of the listed investment options in which you can invest and save tax under Section 80C. The deduction limit for this section is Rs. 1.5 lakhs, and you can invest the entire amount in NPS if you wish and claim the deduction.

The Tax Benefits under Section 80CCD (2)
This benefit can be availed on the contributions made by the employer; hence, this one is meant for the salaried individual and not self-employed. 

Government employees can claim 14 percent of their salary tax deduction under this section. Meanwhile, for private-sector employees, it is capped at 10 percent of their salary.

Let’s see the benefits of NPS through an example:
Suppose a corporate employee earns Rs 7 lakh as the basic salary and another Rs 3 lakh as Dearness Allowance. 

So he can claim Rs 1, 00,000 (10 percent of Basic + DA) on his employer’s contribution. Besides, if he adds the deductions under Section 80CCD (1B) and Section 80C, he can claim deductions up to Rs 3 lakh.

NPS Tax Deductions for a Salaried Individual

Basic Salary ₹ 7 lakh
DA ₹ 3 lakh
Deductions under 80C ₹ 1.5 lakh
Deductions under Section 80CCD (1B) ₹ 50,000
Deductions under Section 80CCD (2) (10% of Salary + DA) ₹ 1,00,000
The total deduction that can be claimed ₹ 3 lakh

The Tax benefits on returns of and maturity amount
Tax benefits of NPS don’t just end at the investment amount. As an investor, you don’t have to pay any tax on the returns or the maturity amount also. This kind of tax treatment is called EEE i.e. exempt-exempt-exempt. In India, this tax treatment is available only on a selected few financial products.

NPS with its tax benefits can help you reduce your taxable income by quite a bit. However, it shouldn’t be the only reason for you to invest in it. It is a great product to build a corpus for your retirement thanks to its low cost and flexibility. So invest for the right reason.

Corporate Fixed Deposit

CFD Better Then Bank FD (Fixed Deposit)

FDs are normally a fixed deposit and a saving instrument, which gives a higher rate of interest than a regular savings account. 

It is a term deposit in which we invest in a lump sum amount and we get interest on it till maturity. 

FD’s are normally offered by the bank. But NBFC’s (Non-Banking Financial Companies) also offer the FD’s and it is known as Corporate Fixed Deposits. They are the same as bank FDs.

Corporate Fixed Deposit (CFD) is a term deposit that is held over a fixed period at fixed rates of interest. The maturities of various corporate fixed deposits can range from a few months to a few years.

Their functioning is somewhat similar to Bank FDs but they are offered a higher rate of interest. The risk involved with corporate FDs is significantly higher. If the company hits a recession or goes bankrupt then the returns cannot be provided at the maturity of corporate FDs.

The medium of the deposit is a certificate of deposit. The corporate FDs are not insured, that means, in case of default you will not get Rs 5 lakh as in the case of bank fixed deposits. It gives high returns as compared to Bank FD’s as they involve high risks.

Key benefits of Corporate FD’s :

Higher returns – Enjoy greater returns from Corporate FDs as compared to the bank FDs.

Flexibility – Choose Corporate FDs as per your preference from a variety of tenures such as monthly, quarterly, half-yearly, or yearly.

Liquidity – Enjoy better liquidity with Corporate FDs with a lower lock-in period than Bank FDs

Premature Withdrawals – Opting for premature withdrawal in FD means depositors can withdraw their amount and close the account before the term ends.

Safety – Company deposits are carefully inspected by credit rating agencies. These agencies check whether such FDs are safe and stable.

Tips for choosing a Corporate FD:

Credit Rating: Opt for higher-rated corporate FDs based on its credit rating which indicates the underlying risk of the company.

Company Background: Assess a company’s business viability by referring to its Financial Statements, Management Discussion, and Analysis (MD & A).

Repayment History: Companies’ repayment history helps to determine the company’s credit score, credibility, and stability.

Risk profile: Make sure that the company you pick is financially healthy and helps you rule out any default risk during the fixed deposit period.

Terms of FD: A cumulative scheme could be better than a regular income option as the interest earned gets invested in other avenues. At the end of the day, you’ll have a lump-sum amount in your hands. But not if you’re looking for a regular income from the FD.

Here are the top NBFC’s recommended by our expert.
1. HDFC Ltd (Housing Development Finance Corporation Ltd)
2. PNB Housing (Punjab National Bank Housing Finance)
3. Mahindra Finance (Mahindra & Mahindra Financial Services Ltd)