• National Pension Scheme Details

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    By Prarthana Gopal | 09 Feb 2023

    National Pension Scheme (NPS) a social security scheme that provides a regular pension after retirement to those in the private, public, and unorganised sectors. It is also open to government employees. It is a government approved, market-linked retirement plan with operations that are regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The minimum annual contribution is Rs.6000 that can be made in installments of Rs.500 or as a lump sum. It is open to all Indian citizens between the ages of 18 and 60. It also provides tax benefits of an additional Rs.50,000 under Section 80C and 80CCD.

    Know more about the National Pension Scheme

    The National Pension Scheme encourages people to invest regularly in their pension account so that they will get a regular pension after retirement. A percentage of the corpus can be withdrawn after retirement. The remaining amount will be disbursed monthly as a pension after retirement. One of the advantages of NPS is that it can be transferred across locations and jobs without any hassles. Since 100% of the corpus has been made free of tax deductions, it is a very valuable way of ensuring that you have enough money to lead a comfortable life post retirement.

    Who should invest in NPS?

    NPS is ideal for anyone who requires a regular monthly income post retirement. It is perfect for those with a low-risk appetite for investments. It is an effective way to plan for a comfortable life after retirement especially for those who may not receive any such monthly pension benefits, such as those in the private, public, or unorganised sectors. It also provides tax benefits during the years in which you draw an income, which helps in saving tax and saving money.

    Benefits of NPS

    These are the major benefits of NPS:

    1. Return on Investment:

    2. The RoI of NPS is higher than other government tax-saving schemes such as the Public Provident Fund (PPF). A portion of NPS funds is invested in equities, which while not providing guaranteed returns, does provide higher returns when it performs well. Over the past decade, the annualised returns of NPS has been in the 8% to 10% range. If not satisfied with the performance of your funds, you also have the option of changing your fund manager under the NPS scheme.

    3. Tax benefits

    4. Investing in NPS provides tax benefits of up to Rs.1.5 lakh that includes your personal contribution as well as your employer’s contribution (if any). However, the total tax deduction allowed under NPS is Rs.2 lakh because you get an additional tax deduction for up to Rs.50,000 of self-contribution. This is an NPS tax benefit under Section 80CCD (1B).

      • Section 80CCD (1): This is for self-contribution which comes under Section 80C. For taxpayers who are self-employed, the maximum eligible limit for tax deduction is 20% of the gross income. For other individuals, the maximum limit is 10% of the salary.
      • Section 80CCD (2): This is for the employer’s contribution, which does not fall under Section 80C. The lowest amount among one of the following is considered as the maximum eligible limit for tax deduction: Gross total income or 10% of basic salary + Dearness Allowance (DA) or employer’s NPS contribution.
    5. Exit and early withdrawal

    6. You can withdraw a percentage of your funds for use in specific situations. These are the conditions for an early withdrawal or exit for those in tier I accounts:

      • You may withdraw 25% of your funds after completing 3 years of contributions but only for specific purposes. These include higher studies or wedding of a child, medical expenses for a family member or self, building a house, etc.
      • During the entire tenure of the scheme, you can withdraw a percentage of your funds a total of 3 times with a gap of 5 years in between each withdrawal.
    7. Withdrawal after the age of 60:

    8. After the age of 60, the entire corpus from your NPS account. It is mandatory that 40% of the corpus remain in your account in order to provide the monthly pension. This will be disbursed through an insurance firm that is registered with the PFRDA. The entire withdrawal amount is exempt from income tax.

    9. Safe risk assessment:

    10. In order to protect your corpus from the volatility of the equity market and stabilise the risk-return ratio for investors, there is a cap on how much of the corpus is invested in equity funds. Exposure to equity ensures that the return on investment for NPS is higher than other savings schemes and the cap ensures that funds are protected too.

      The range for maximum equity exposure of NPS contributions for non-government employees is 50% to 75%. For government employees, it has been capped at 50%. After the investor turns 50, this is reduced by 2.5% each year. For investors above the age of 60, there is a cap of 50% on equity exposure.

    11. Flexibility to change your fund manager

    12. Both tier I and tier II accounts provide the option of changing your fund manager or scheme if you are not satisfied with the returns.

    13. Allocation of equity

    14. Although the funds from NPS is invested in a variety of schemes, scheme E’s investment is in equity. A maximum of 50% of your funds can be allocated to equities through two ways – active choice and auto choice.

    15. Active choice:

    16. If you choose the active choice option, then you can choose which schemes to invest in and how the funds will be split.

    17. Auto choice:

    18. If you choose the auto choice option, the risk profile of your investments is decided for you according to your age. The older you are, your investments will be chosen based on less risk and more stability.

    Types of NPS accounts

    There are two types of NPS accounts. These are tier I and tier II. The details of these are as given below:

    Type of account Status Tax Exemption Minimum Contribution Maximum Contribution Withdrawals
    Tier I Default Up to Rs.2 lakh p.a Rs.500 monthly or Rs.1000 p.a. No limit Not allowed
    Tier II Voluntary For non-government employees-None For government employees: Up to 1.5 lakh Rs.250 monthly No limit Allowed

    Opening an NPS account

    You can open an NPS account in two ways: offline mode and online mode. Here is how to do it:

    Offline mode:

    NPS accounts are opened offline through a Point-of-Presence (PoP) which includes banks. If you are approaching a bank and you have already submitted your KYC details to the bank, then all you need to do is fill up the subscriber form, submit it, and make an investment. If your KYC details are not updated, you will have to provide it along with the form, submit both, and make an investment. You will be sent a sealed welcome kit which will contain your Permanent Retirement Account Number (PRAN) and password. The one-time registration fee for this is Rs.125.

    Online mode:

    You can open an account online on the website of the National Pension System Trust (eNPS). Create an account and link it with your mobile number and Aadhaar or PAN. The registration is validated using an OTP sent to your registered mobile number. A PRAN will be generated which you can then use for subsequent login.

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