Among Indians, the popularity of NPS has soared in terms of retirement planning, especially in recent years. Noticing this trend, the Pension Fund Regulatory & Development Authority (PFRDA) has also introduced specific features that are likely to further fortify the diverse needs of investors.
Earlier the scheme was believed to provide relief only with respect to tax savings. But now the funds equally attract two different generational cohorts - the Gen Zers and the millennials as they offer room for adjustable market-linked returns. Details regarding its components have been shared below.
Why is NPS Popular Among Millennials and Gen Z?
Budgeting is one of the biggest challenges faced by young adults of this generation. As the market has become saturated with various forms of investment options and credit payments, the younger population is facing too many issues with saving and spending responsibly.
Thankfully, the Central Government offers a sure-shot way to create a substantial retirement corpus through the National Pension Scheme. On registering for this facility, a beneficiary can choose from 8 different pension fund managers as per their risk-taking abilities. Thus, NPS becomes a great instrument for long-term financial security and simultaneously the Gen Zers also do not need to compromise on their ‘want’ reserves.
Benefits of NPS for Millennials and Gen Z
As a premium government-backed program, the NPS encourages all millennials and Gen Zers to ensure financial independence for the post-retirement period.
Upon contributing to an NPS account your investment gets diversified across multiple asset classes like equity, corporate and government bonds, alternate assets, etc. Therefore, you remain at an advantage of earning higher risk-adjusted returns.
Next, when you go for the NPS scheme, several tax benefits follow as per Section 80C and 80CCD(1B) of the Income Tax Act.
Finally, it develops the noble habit of regularly saving a significant portion of the hard-earned money. As a result, all the beneficiaries will be able to achieve sufficient monthly payments after their scheme is over, provided they subscribe to an annuity plan.
How NPS Impacts the Financial Future of Millennials and Gen Z?
The NPS allows individuals to evaluate and determine how they want to grow their pension wealth. Not only does it help to create a considerable post-retirement corpus pretty easily but also you do not need to worry about any complex KYC procedures. Additionally, the minimum contribution can be as low as Rs. 250 a year based on the NPS account chosen.
Thus, even self-employed individuals who may not have a regular income source can start an NPS account right away. While opening the account the person themself can select among the highly qualified fund managers. Also, they can determine the monthly contributions independently.
Most importantly, by maintaining an NPS account from literally anywhere, account holders can enjoy tax benefits of up to Rs. 2 Lakhs annually.
Key Steps for Millennials and Gen Z in Utilising NPS
To open an NPS account, one doesn’t have to run for elaborate arrangements. All they have to provide are their PAN cards and other necessary personal information. Online application for an NPS account hardly takes a few minutes. Contrarily, if you prefer opening the account offline it can take up to 10 days to register.
Investment Options within NPS for Millennials and Gen Z
Across the NPS scheme, you will get four different asset class options to grow your wealth. These asset classes are put forward by Pension Fund Managers and are classified as follows:
- Equity: Under this type of fund option, your money gets primarily invested in equity market segments.
- Corporate Debt: These schemes put your money in Public Financial Institutions (PFIs), bonds issued by Public Sector Undertakings (PSUs), and corporate money-making instruments.
- Alternative Investment Funds: You may assume that money is getting invested in REITs (Real Estate Investment Trusts), AIFs (Alternate Investment Funds), and CMBS (Commercial Mortgage-Backed Security) under this class.
- Government Securities: This segmentation represents schemes that involve securities held by the Central and State Governments.
As a subscriber, you can decide whether to go for 'active choice' or 'auto choice' in an NPS scheme. Most new-gen applicants choose the active option where they have a greater say regarding where they wish their contributions to be invested. However, there are still boundaries for such preferences. For instance, the maximum permissible allocation for equities cannot cross 75% of the contribution.
On the other hand, the auto-choice NPS scheme adopts a life-cycle-based methodology. Under this option, your money is allocated across the various available assets. Subsequently, the equity exposure gradually diminishes as an NPS account holder approaches their retirement age.
Planning for Retirement with NPS as a Millennial or Gen Zer
Gen Zers and millennials are leveraging digital fintech instruments to plan for the future. Their investment options are no longer solely directed by banks and brokers. Today a number of trustworthy online platforms are available that teach aspiring investors how they should engage with mutual funds, the stock market and government schemes like NPS.
So, individuals can improve their overall financial prospects by hedging their capital across Tier-1 and Tier-2 accounts. Both of these account types have distinct features along with some tax benefits.
Understanding Compound Interest in NPS Investments
The interest earnings coming from an NPS account are market-linked. Historically, the NPS subscribers have received returns between 9.00% to 12.00% p.a. according to the account type chosen. It acts as a key factor for influencing National Pension Scheme popularity in India.
If you have a Tier-1 account then you will notice the interest is compounded yearly. Contrarily, if you voluntarily create a Tier-2 account then interest compounds daily but the interest is credited at the end of a fiscal year.
Comparing NPS with Other Investment Plans
Choosing a clear winner among the various available investment plans is not easy as each contributes differently towards financial growth. So, it will be fair to compare the features individually to find out the causes supporting the popularity of NPS.
Exploring the Benefits of NPS over Traditional Fixed Deposits
To assess the reason behind the popularity of NPS compared to FDs, we have to go through these parameters:
- Rate of Interest: For fixed deposit schemes although the earnings are predictable they fail to match NPS returns as the latter scheme is based on the performance of equity assets.
- Tax Benefits: While FDs offer you tax advantages of up to Rs. 1.5 Lakhs every year, with the NPS scheme you may claim Rs. 2 Lakhs worth of tax benefits under Section 80C and Section 80CCD.
- Long-term Planning: Fixed deposits can be ideal for fulfilling your short-term aspirations as they provide assured returns and offer more liquidity. Whereas, an NPS account allows one to strategically plan for their post-retirement life.
Practical Advice and Tips on Navigating NPS for Millennials and Gen Z
Now that you are aware that NPS accounts allow you to gather a substantial corpus, in the upcoming sections we have discussed some basics that will facilitate easy handling of NPS accounts.
How to Open an NPS Account Online for Millennials and Gen Zers
To register your NPS account online follow the steps mentioned in the blog ‘NPS Login: How to open an NPS account online?’
Maximising Tax Deductions through NPS Investments for Gen Z and Millennials
The National Pension Scheme is a crucial tax-saving vehicle for all Indians as per the latest tax regime. If someone's salary falls under the range of Rs. 4 Lakhs - Rs. 10 Lakhs then they can claim a complete deduction on applicable taxes by contributing to NPS. This regulation is as per 80 CCD(1) of the Income Tax Act.
Importance of Financial Planning Early in Life for Millennials and Gen Z
The absence of financial planning can lead to long-term consequences. Thus, you should focus on strategic investments to improve your financial health and reduce dependency on debts.
Also, it keeps your lifetime savings secure which you accumulate to buy a new house or start some business of your own. Thus, financial planning should be done proactively to build wealth and avoid impulsive decisions that often lead to unwanted expenses.
Conclusion
The popularity of NPS is true among the masses as it secures stable income even after retirement. Thus, you can stay at peace and spend without worrying about burdens. Also, as there is the provision to adjust risk exposure, Gen Zers and millennials see NPS as an excellent opportunity to secure their lifestyle. Thus, you can subscribe to a plan, either tier-1 or tier-2 to correlate with the market’s revenue growth.
