NPS is a long-term investment plan undertaken by the Central Government of India, which seeks to provide retirement benefits to the employees of public, private, and even unorganized sectors. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act 2013. The scheme is voluntary which is managed by professional fund managers.
What is NPS?
National Pension Scheme (NPS) is a government initiative that started in January 2004 only for government employees. However, after 5 years which is in 2009, it was opened for all public and private sector employees of the country. Under this scheme, registered people need to contribute regularly during their working life. And on retirement, the account holders can withdraw a part of the corpus in a lump sum and can use the remaining corpus to buy an annuity to secure a regular income after retirement.
The NPS is a very good scheme that helps you plan your retirement additionally it has a low-risk appetite which makes it worth it.
Investing in NPS can be a boon for the private sector employees who don’t have retirement benefits, as investing in NPS will provide them with retirement benefits.
It is even good for those who are looking for a tax-saving investment portfolio as investments made under NPS are tax-deductible under section 80C and 80CCD of the income tax act.
Returns and Interest
Only a few know that a portion of the NPS goes to equities that may not generate guaranteed returns from the investments made. However, the returns generated are much higher than other investments like the PPF and FDs. Till now the scheme has been in effect for over a decade and has delivered 8% to 10% annualized returns, which is quite good. Another benefit with NPS is- it allows you to change your fund manager in case you are not satisfied with the returns/performance of the fund.
Types of account offered by NPS to its subscribers:
Tier I: This is the primary account and is the same as a pension account that has restrictions on withdrawals and utilization of accumulated corpus.
- The account has a lock-in period which is till the account holder turns 60. However, partial withdrawal is allowed under specific conditions.
- The contributions made under tier I accounts of NPS are tax-free and are tax-deductible under Section 80CCD (1) and Section 80CCD (1B) of the Income-tax act.
- In an NPS Tier 1 account, one can contribute up to ₹2 lakhs and avail a tax exemption for the invested sum, Under Sec 80CCD(1) & 80CCD (1B).
Tier II: The tier II account provides more liquidity to its subscriber which helps them during emergencies
- . Tier-II accounts are of the subscribers with pre-existing Tier I accounts and are allowed to deposit and withdraw money as per their convenience.
- This account is similar to a mutual fund account in characteristics but offers no Exit load, no commissions, and good returns. However, the Tier 2 NPS account offers tax benefits only to government employees under certain conditions.
Tax benefits on withdrawals
An NPS account holder is allowed to withdraw a lump sum of up to 60% of the corpus in a tax-free manner at the age of 60 and over. However, the remaining 40 % can be used to obtain an annuity plan to earn monthly pension payments. The important things you need to know here is the remaining 40 % used to purchase the annuity contract is completely tax-free. However, depending on the income tax slabs applicable to the receipt, the pension income earned from the annuity scheme is taxable.
How to Open an NPS Account?
You need to open an NPS account with entities known as Point of Presence (POP). Both private and public sector banks are enrolled as POPs. And the authorized branches of a POP which are called the point of presence service providers (POP-SPs), act as the collection points, and an NPS account can be open there.
To do it online you can also visit the website of Pension Fund Regulatory and Development Authority (PFRDA) which is – https://www.npscra.nsdl.co.in/pop-sp.php
What is the minimum contribution in NPS?
The minimum contribution needed in an NPS account is ₹ 6,000 in a Tier-I account in a financial year.
In case you do not contribute the minimum amount, your account will be frozen. and you need to pay a penalty of ₹ 100 to unfreeze it.
Points to Know about NPS:
- NPS offers 8%-14% annualized returns.
- A portion of the fund from the national pension scheme goes into equities.
- The returns offered by NPS are much higher than other traditional tax-saving investment portfolios such as PPF.
- You are allowed to change your fund manager in case you are not satisfied with the performance of the funds.
- You can avail of tax benefit on the amount invested under the tier-I account which is up to ₹2 lakhs.
- For the tier-I account, you need to make a yearly contribution of ₹ 6000 and ₹ 500 as a one-time contribution. Whereas for the tier-II account, you need to make a yearly contribution of ₹2000 and ₹250 as a one-time contribution.
- Withdrawal of the entire corpus is not allowed.
- One can open an NPS account through both online or offline processes.
- One can withdraw up to 3 times within 5 years of intervals in the entire tenure.
NPS is a good investment option if you are looking for retirement benefits, the scheme is open for everyone be it a public or private sector employee. Apart from the retirement benefits the scheme provides very good returns and comes with tax along with tax benefits.