Planning for retirement can pose a challenge for many, particularly when individuals are uncertain about whether to prioritize equities or debt in funding their future financial needs. Additionally, pension plans provided by different insurance companies in India may not consistently provide appealing annuity payouts.
On the other hand, low-cost retirement solutions like the National Pension System (NPS) offer a diverse array of investment options and pension fund schemes, thereby simplifying the process of retirement planning.
Just as doctors discourage patients from self-diagnosing via Google before taking medicine for their physical health, wealth experts recommend exercising caution before basing financial decisions solely on advice found on the internet for better financial health.
This government-sponsored pension scheme (NPS) rolled out by the Pension Fund Regulatory and Development Authority (PFRDA), is accessible to all. Any citizen of India between 18 to 70 years of age can apply to create an NPS account. This means that regardless of income level and status, individuals can contribute to this scheme throughout their working lives in small installments, ultimately reaping the benefits post-retirement.
What is corporate NPS?
Corporate NPS, an extension of the National Pension Scheme (NPS), is designed to enable corporations to provide NPS investment benefits to their employees. The Pension Fund Regulatory and Development Authority of India (PFRDA) introduced the ‘Corporate NPS’ model for this purpose.
In the Corporate NPS scheme, both employers and employees contribute to the latter’s NPS account, encouraging disciplined savings for retirement. Contributions from both parties are then invested in a diversified portfolio comprising stocks, bonds, and other securities, with the aim of generating returns over the long term to support retirement income.
Eligibility Criteria for Corporate NPS
The following eligibility criteria must be adhered to for an individual or entity to subscribe to the Corporate NPS scheme:
- You must be an Indian citizen
- You should be between 18 and 70 years of age
- You should be an employee of an entity registered under the NPS Corporate Model (this includes Entities registered under different Co-operative Acts, Entities registered under the Companies Act, 2013, PSUs, Registered Limited Liability Partnerships, etc.)
Why should you invest in Corporate NPS?
1) Minimum investment
The minimum initial contribution required at the time of registration for NPS Tier I accounts is ₹500, while it is ₹1,000 for Tier II accounts. Following that, the annual minimum contribution for Tier I accounts is ₹1,000, whereas Tier II accounts have no minimum annual contribution requirement.
2) Portability
Corporate NPS offers a portability option, allowing employees to transfer their accumulated corpus to their new employer. This feature ensures a hassle-free arrangement for individual subscribers when transitioning to a new job or location, eliminating the concern of leaving behind the corpus built, a common issue with many pension schemes in India.
3) Do I get extra tax breaks if my employer offers NPS?
If you contribute to NPS under the All-Citizens’ Model, you are eligible for deductions under section 80C, with a limit of Rs 1.5 lakh [Section 80CCD (1)]. Your contributions as an employee will also entitle you to this tax benefit. Additionally, you can claim an additional deduction of Rs 50,000 under section 80CCD (1B).
For salaried employees whose cost-to-company structure includes employer contributions to NPS, they qualify for a deduction of up to 10 percent of their salary (basic plus dearness allowance) up to Rs 7.5 lakh under section 80CCD (2). In the government sector, this deduction can go up to 14 percent. Meanwhile, the individual’s own contributions remain eligible for deductions under section 80CCD (1) and 80CCD (1B).
All these deductions are available under the with-exemptions tax regime, and it’s noteworthy that the tax exemption on the employer’s NPS contribution has been retained under the new tax regime as well.
4) Maturity benefits and partial withdrawals
The withdrawal rules for NPS remain consistent: at the age of 60, you can withdraw 60 percent of the corpus as a lump sum. The remaining 40 percent must be converted into annuities, which will provide you with a pension post-retirement. Additionally, partial withdrawals of up to 25 percent of your own contributions are permitted after three years for specific purposes such as critical illnesses, purchasing property, funding children’s education, and other eligible circumstances.
5) Taxability of returns
The returns earned on NPS and the lump sum withdrawal at the age of 60 years are tax-free. However, upon withdrawing 60% of the corpus at 60 years, the remaining 40% must be used to purchase annuity plans.
While the lump sum withdrawal and returns are tax-free, the monthly payout received in the form of an annuity is taxable. This payout is treated as income in the year of receipt, subject to applicable income tax rates.
6) Investment flexibility
NPS subscribers enjoy the flexibility to switch between various investment options, including equity, government securities, and bonds, as well as between multiple fund managers. Additionally, account holders can opt for either the Active or Auto mode for investing.
In the Active choice, NPS subscribers personally allocate percentages across asset classes based on their preferences. Conversely, the Auto choice entails automatic allocation of funds among asset classes using a predetermined matrix. This allocation is determined by the subscriber’s age, ensuring a suitable investment strategy based on lifecycle considerations.
7) Diversification
Since NPS investments are diversified across both debt and equity, they offer the opportunity to earn market-linked returns while also providing stability.
8) Well regulated
NPS is overseen and regulated by PFRDA, ensuring transparent investment norms, consistent monitoring, and performance evaluation of fund managers by the NPS Trust.
9) Power of compounding
Investors can leverage the power of compounding over the accumulation period of their pension wealth. With low account maintenance charges, the accumulated pension wealth can grow significantly over time, offering substantial benefits in the long run.
10) Easy to access
Transactions can be carried out online making it hassle-free. Investors can easily check the NAV, monitor fund performance, and track contribution status at any time through the platform.
Do I need NPS when I already have PF?
PF is a small component as pension under the Employees’ Pension Scheme (EPS) might not adequately support one’s retirement lifestyle. Moreover, relying solely on the EPF amount may fall short of meeting post-retirement financial needs due to inflationary pressures. To address this, subscribing to NPS alongside PF can be advantageous. Additionally, there exists a provision allowing recognized provident funds to be transferred to NPS, providing a comprehensive retirement planning approach.
