“Say goodbye to tension, and hello to your pension”
In India, the concept of retirement planning is still, quite vague. It is believed to be the most procrastinated long-term financial goal of a human’s life. Retirement is the age that proffers you the time to catch up with things that you might have missed out on early due to personal & professional commitments.
Now the government has come up with many financial products designed to conquer the financial needs during the golden period. Out of that product list, NPS or National Pension Scheme is believed to be the record-breaking financial product for retirement.
Without further ado, let’s understand this financial product and how it is good for investment:
What is the National Pension Scheme (NPS)?
NPS or National Pension Scheme is an initiative of social security that is a government-owned investment option. This is designed to meet the financial needs of employees of private, public, or unorganized sectors for their retirement. The introduction this scheme was first made for the central government and later on, it was introduced to all the citizens of India between the ages of 18-60 years.
Another category of individuals could be those who are looking for cost-efficient solutions to accumulate their retirement corpus through strategic investment planning. Also, if they are comfortable with longer lock-ins and high exposure to equities! A systematic discipline of investment like this will surely make a huge difference in your life post-retirement life.
The best part of investing in NPS is that it comes with additional tax benefits. For instance
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- Under section 80CCE a deduction up to Rs. 1,50,000 can be claimed;
- Under section 80CCD(1B) up to Rs. 50,000 can be claimed;
- Lastly, under section 80CCD(2) up to 10% of the basic salary can be claimed.
In addition to tax benefits, NPS gives the liberty to invest up to 75% of your fund in equity. Since NPS is a market-linked investment, it can beat inflation with its returns over the long term. Therefore, a best-suited financial product in helping secure the golden years of the investors.
Also Read: NPS vs PPF: Which is Better For Retirement?
Who Should Invest in NPS?
NPS progressively reduces the equity exposure every year as the investor gets old, so investors who cannot decide upon their asset allocation are best suited for this product. Another category could be those investors who don’t have time to actively manage their investments.
Another category of individuals could be those who are looking for cost-efficient solutions to accumulate their retirement corpus. Also, if they are comfortable with longer lock-ins and high exposure to equities! A systematic discipline of investment like this will surely make a huge difference in your life post-retirement life.
Types of NPS Accounts
Under the NPS there are two account types, one is tier I, and the second is tier II. The table below explains the two account types in detail.
National Pension System (NPS) in India offers two main types of accounts: Tier-I and Tier-II.
Tier-I Account is the primary NPS account and is mandatory for all subscribers who join the NPS. The minimum contribution required to open a Tier-I NPS account is typically ₹500. Subsequent contributions can be made at the subscriber’s discretion, but there is a minimum annual contribution requirement of ₹1,000 to keep the account active. Withdrawals from this account are restricted and subject to specific conditions. Generally, subscribers can only withdraw a portion of the accumulated corpus upon retirement or reaching the age of 60.
Tier-II Account is an optional savings facility available for NPS subscribers, designed to provide more flexibility in withdrawals compared to the Tier-I account. The Tier-II account allows subscribers to withdraw their savings whenever they want, without any penalties. Subscribers can invest in Tier-II accounts only if they have an active Tier-I account.
The minimum contribution required to open a Tier-II NPS account is ₹1,000. There is no requirement to deposit any minimum amount each year to keep the Tier II NPS Account active.
NPS Benefits
No need to worry about RETURNS
As discussed above, a portion of NPS investments goes toward equities, and because of market volatility guaranteed returns cannot be assured. However, the National Pension Scheme offers much higher returns than traditional investments like the PPF or Fixed Deposits. For over a decade, NPS has been known to deliver 8%-10% annual returns.
Risk Assessment
For NPS there is currently a cap in the range of equity exposure that is in the range of 75% to 50%. There is a 50% cap for government employees in which each year the equity portion will be reduced by 2.5%, once the investor turns 50 years.
Whereas, in a scenario where the investor is 60 years and above the cap is fixed at 50%. This is done to stabilize the risk-return balance for the investors. Further stating that this will save the corpus of the investor from the equity market volatility.
Flexibility in Fund Allocation
Another benefit of NPS is that it comes with the advantage of designing the fund portfolio at the convenience of the investor. Investors have the freedom to allocate funds as per their risk appetite and can be re-arranged too if the investor is not happy with the fund’s performance.
Withdrawals and Exit Rules
In NPS, you are not allowed to withdraw the entire corpus saved for your retirement. It is mandatory to keep aside at least 40% of the corpus to receive a regular pension from the PFRDA (Interim Pension Fund Regulatory & Development Authority). This is the case when you wish to withdraw your amount once you have reached the age of 60 years.
Secondly, it is crucial to continue investment in NPS till the age of 60. But in case of emergency, you can withdraw up to 25% only if you have been investing for three years. These emergencies could be your child’s wedding or higher education, medical treatments, purchasing a house, etc. You can make a withdrawal up to three times (with a gap of five years) in the entire tenure.
How does the NPS scheme work?
NPS was introduced by the Pension Fund Regulatory and Development Authority (PFRDA) in 2004. Initially, the scheme was accessible only to government employees but was later opened to all sections of society, including Non-Resident Indians (NRIs). Subscribers can contribute regularly to their NPS account during their working life. These contributions accumulate and grow over time, forming the retirement corpus. Upon retirement, subscribers can withdraw a portion of their accumulated corpus. Typically, 60% of the deposited amount can be withdrawn in a lump sum. The remaining 40% of the corpus is utilized to purchase an annuity.
National Pension Scheme Tax Benefits
The NPS offers significant tax benefits to its subscribers, including the following:
1. Individuals contributing to their NPS Tier-I account are eligible for a deduction of up to 10% of their salary within the overall limit of ₹1.5 lakh per financial year.
2. An additional deduction of up to ₹50,000 is available under Section 80CCD(1B) for contributions made towards the NPS Tier-I account. This deduction is over and above the limit available under Section 80C.
3. Further, Section 80CCD (2) allows for an employer’s contribution to the NPS Tier-I account of an employee to be claimed as a deduction. The deduction is limited to 10% of the employee’s salary (Basic + Dearness Allowance).
These deductions provide significant tax benefits to individuals contributing to the NPS, encouraging them to save for their retirement while reducing their taxable income.
National Pension Scheme Eligibility
To be eligible to join NPS, an individual must meet the following criteria:
- Citizenship: Must be an Indian citizen (resident or non-resident) or a Non-Resident Indian (NRI).
- Age: Should be between 18 and 70 years old.
- KYC Compliance: Must comply with the Know Your Customer (KYC) norms specified in the NPS application form.
- Legal Competency: Should be legally competent to enter into a contract as per the Indian Contract Act.
- Exclusions: Overseas Citizen of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
- Individual Account: NPS is an individual pension account and cannot be opened on behalf of a third person.
How to Invest in National Pension Scheme?
The Pension Fund Regulatory and Development Authority (PFRDA) oversees the National Pension System (NPS), offering both online and offline options to open an account.
- For offline enrollment, individuals can locate a Point of Presence (POP), which may include banks registered with the PFRDA.
- They need to obtain a subscriber form from the nearest POP and submit it along with the necessary KYC documents.
- Upon making the initial investment (minimum of Rs. 500 for a Tier I account), the POP will issue a Permanent Retirement Account Number (PRAN). This PRAN, along with the password provided in the sealed welcome kit, enables account operation.
- Opening an NPS account online is streamlined and can be completed in less than half an hour. By linking the account to PAN, Aadhaar, and mobile number, users can register easily on the e-NPS portal (enps.nsdl.com).
- Registration is validated through an OTP sent to the mobile number, generating the PRAN for NPS login purposes.
