Everything you need to know about NPS

National Pension System (NPS) is a government-backed pension scheme that allows individuals to save for their retirement.

The scheme was launched in 2004 and is open to all citizens of India between the ages of 18 and 60.

The objective of the NPS is to provide a comprehensive, low-cost and flexible pension system that can cater to the needs of diverse population segments.

What is NPS?

The NPS is a defined contribution pension system, where the individual contributes a certain amount towards their pension corpus.

The corpus is then invested in various asset classes such as equity, fixed income, and government securities. The returns on these investments determine the final corpus, which can be used to purchase an annuity or pension plan to provide a steady income during retirement.

The NPS is a market-linked scheme, which means that the returns on the investment are subject to market fluctuations. However, the long-term returns are expected to be higher than traditional fixed-return investment options.

Account types under NPS

Tier I and Tier II are two types of NPS accounts.

• Tier I account is a mandatory pension account that is non-withdrawable, except in certain circumstances.

Contributions to this account are eligible for tax benefits under Section 80CCD of the Income Tax Act. The Tier I account is opened at the time of joining the scheme, and contributions are made regularly.

No withdrawal is allowed from this account before age 60 except in certain cases, such as terminal illness and permanent disability.

• A tier II account is a voluntary savings account that can be opened by individuals who already have a Tier I account.

This account is similar to a savings account, and contributions to this account are not eligible for tax benefits.

The Tier II account allows for withdrawals and also allows for partial withdrawals.

The contributions to the Tier II account are not mandatory and are made only when the individual wishes to make them.

How do your contributions get invested?

When an individual opens an NPS account, they are required to choose a pension fund manager and an investment pattern.

The investment pattern determines the allocation of funds between equity, fixed-income, and government securities. The pension fund manager invests the funds in various instruments based on the investment pattern chosen by the individual.

The investment pattern can be changed anytime, subject to certain conditions.

The investment pattern can be selected from the following options:

• Auto choice: In this option, the allocation is done automatically based on the individual’s age. As the individual approaches retirement, the allocation to equity gradually decreases and the allocation to fixed income increases.
• Active choice: In this option, the individual can choose the allocation between equity, fixed income, and government securities.

Tax Benefits of NPS

NPS offers tax benefits to individuals under Section 80C and Section 80CCD of the Income Tax Act.

Contributions to the Tier I account are eligible for a tax deduction of up to Rs.1.5 Lakhs under Section 80C and an additional tax deduction of up to Rs. 50,000 under Section 80CCD(1B).

The tax benefits are subject to certain conditions, and the individual should consult a tax expert for more details.

NPS withdrawal on maturity

Upon reaching 60, individuals can withdraw up to 60% of the corpus accumulated in their NPS account.

The remaining 40% of the corpus must be used to purchase an annuity or pension plan to provide a steady income during retirement. The annuity provides a steady income to the individual during the post-retirement phase.

The annuity can be purchased from any of the annuity service providers authorised by the Pension Fund Regulatory and Development Authority (PFRDA). The individual can also choose the annuity plan and the annuity service provider.

Advantages of Investing in NPS

NPS offers several benefits to individuals, including:

• Low cost: NPS is a low-cost pension scheme, with charges for pension fund management, record-keeping, and administration being less than 1% of the corpus.
• Flexibility: NPS allows individuals to choose their pension fund manager and investment pattern, giving them greater control over their retirement savings. The individual can also choose the annuity plan and the annuity service provider.
• Tax benefits: Contributions to the NPS are eligible for tax benefits, making it a tax-efficient way to save for retirement.
• Liquidity: The Tier II account provides liquidity to individuals, allowing them to withdraw their savings as and when required.
• Portability: NPS offers portability of the account, which means that the individual can continue to use the same account even if they change their job or location.
• Transparency: NPS offers transparency of the account, which means that the individual can track their investments and the corpus at any time.

In conclusion, NPS is a government-backed pension scheme that offers tax benefits and flexibility to individuals looking to save for retirement.

The scheme is open to all citizens of India between the ages of 18 and 60 and provides a low-cost and tax-efficient way to save for retirement.

It also offers flexibility in terms of investment choices, annuity choices and portability of the account.

NPS is an important step in ensuring a financially secure future for every citizen of India and should be given due consideration in an individual’s overall financial planning.