National Pension Scheme- NPS Features & Benefits
Mini Balakrishnan
When you think about retirement, many significant things come to mind. If one is willing to put in the effort, one can achieve any of these goals. Retirement planning is unique among all of life’s monetary considerations. In retirement, there is no longer any need to work to make money; you no longer have any active income. This implies that you should have enough money saved and invested in supporting your lifestyle for the rest of your life before you quit working.
In contrast to people in several other affluent nations, we do not get any kind of state-provided social security. Salaried people are required to save money for retirement via programs like the Employees’ Provident Fund (EPF) and other similar programs. The notion of nuclear families leaves you to fend for yourself in retirement, in contrast to former times when family members took care of their elders. With people living longer than ever, a comfortable retirement might be 30 to 40 years.
With these concerns in mind, the government of India decided to implement a pension system to help its citizens prepare for their golden years. The National Pension System (NPS) is a government-sponsored retirement savings program through which you may put money aside for your old age pension or build an emergency fund in the event of your untimely demise. Government personnel was given access to the program beginning on January 1, 2004, and on May 1, 2009, the program was made available to all residents of India. The NPS is supervised by the Pension Fund Regulatory and Development Authority (PFRDA).
In this article, we’ll go over the NPS scheme details, its benefits, and more.
What Is The NPS Scheme?
The NPS full form is National Pension System, which is a pension program for anyone interested in establishing a retirement fund or an old-age pension on their terms. All Indian nationals (permanent residents or temporary visitors) between 18 and 65 are eligible to join. Anybody may start contributing to the NPS as late as 60 and keep doing so until age 70.
The NPS benefits all workers, businesses, and independent contractors alike. Employers may choose to provide either NPS or PF to their staff, although workers and independent contractors can sign up for NPS independently. If the employee and the employer agree, the former PF benefits might be transferred to the latter.
Benefits of NPS
In addition to providing full tax advantages on contributions and half-tax benefits on maturity, the NPS scheme benefits also provide a unique investment option not seen in other retirement savings vehicles.
The NPS trust determines the fees associated with running the system, and new subscribers must pay Rs 200 to join. The fees for creating an account are 40 rupees, maintaining it annually will set you back between 60 and 95 rupees, and a single transaction will set you back about 3.75 rupees.
In addition to the custodian’s asset servicing fee of 0.0032%, the Pension Fund Manager’s (PFM) management fee is 0.01% of the assets under management. Even while the POP adds fees to every transaction, they are among the world’s lowest of any financial product. The NPS is the best retirement plan for price and tax efficiency. It is governed by the PFRDA and includes advantages like portability, the freedom to choose across assets and fund managers, and it is affordable and tax-efficient to boot.
Tax Benefits of NPS
The National Pension System (NPS) offers significant tax benefits, making it an attractive retirement savings option. Here’s a breakdown of the tax advantages:
- Taxable (Withdrawal): Withdrawals from the NPS are subject to tax. However, the first 40% of the corpus withdrawn at the time of retirement is entirely tax-free, providing a substantial tax-saving benefit.
- Section 80C Deduction: You can claim a tax deduction of up to INR 1,50,000 per annum under Section 80C for your contributions to the NPS. This helps in reducing your taxable income substantially.
- Additional Deduction Under Section 80CCD(1B): Beyond the Section 80C limit, you can avail of an additional tax deduction of up to INR 50,000 under Section 80CCD(1B). This makes NPS one of the few investment options that offer a total tax deduction of up to INR 2,00,000 annually.
- EET Tax Status: The NPS follows the Exempt-Exempt-Taxable (EET) regime. This means:
- Exempt (Contribution): Your contributions to the NPS are exempt from tax.
- Exempt (Accumulation): The returns generated on these contributions are also exempt from tax.
Types of NPS Accounts
Account Tier 1:
- NPS members must have this particular account.
- Employees in the public sector are required to set aside 10% of their base pay plus DA in this NPS account. There is no disparity in government support.
- Those not employed by the government must put in a yearly minimum of INR 6000 and a minimum of INR 500 to register an account.
- Employees in the private sector may choose between a National Pension System and an Employee Provident Fund. A 10% base pay + DA contribution is required if you choose NPS. In the same proportion, the company will contribute. Remember that the employer contribution is not taxed as long as it is reported on Form 16 under Section 80 CCD2.
Account Tier 2:
- Subscribing to the NPS does not require users to open a Tier 2 account.
- NPS stands for “national pension system,” This model is available to all citizens and allows for withdrawals at any time.
- Neither the government nor the employer will make any payments into this account.
- Tier 2 NPS investments are not eligible for tax benefits.
- A Tier 2 account requires a minimum of INR 1000 to start, with a minimum contribution of INR 250.
- Tier 2 accounts must have a minimum balance of 2,000 (Indian Rupees) at the end of each calendar year.
- Tier 2 accounts have the same tax status as Mutual Funds.
How Are Your Funds Invested in NPS?
When you sign up for the NPS, you’ll need to deposit at least Rs 500 into your Tier I account and Rs 1,000 into your Tier II account. One must pay a minimum yearly contribution of Rs 1,000 under Tier I and Rs 250 under Tier II, while the amount and frequency of future contributions are flexible.
Your contributions to an NPS account may be invested in the market via one of three funds structured according to the kind of assets you choose to put money into. Alternative Investment Funds (A), Equity (E), Corporate Bonds (C), and Government Securities (G) are the four main types of investments available, each of which is further subdivided (See: Available asset classes).
The PFRDA monitors the NPS funds to ensure that participants have a level of safety and soundness, and 7 pension fund firms are in charge of administering the various plans. According to the investing criteria established by the regulator, these organizations actively manage four distinct asset classes.
Subscribers to the NPS can either actively select assets from among the different classes or passively receive allocations based on predetermined parameters. Within the framework of an active selection, the subscriber determines the allocation of funds across several asset classes.
Asset allocation is an automated choice governed by the subscriber’s age. Both choices have their merits; the one you choose should depend on your comfort level in handling the allocation. In light of the NPS’s indefinite duration, switching between the two options is possible. However, early notice is required, and one election per fiscal year is permitted.
Who can register for NPS?
1. Age
- Individuals aged 18 to 70 years can join the NPS. There is no upper age limit for exiting or withdrawing from the scheme.
2. Citizenship
- Indian Citizens: Both resident and non-resident Indians (NRIs) can register for the NPS.
- Overseas Citizens of India (OCI): OCI cardholders are also eligible to join the NPS.
3. Employment Status
- Salaried Employees: Individuals working in the private sector, public sector, or government organizations can enroll in the NPS.
- Self-Employed Individuals: Entrepreneurs, freelancers, and professionals can also participate in the NPS.
- Government Employees: Central and state government employees, except those in the armed forces, are mandatorily covered under the NPS, replacing the earlier pension schemes.
4. Corporate Employees
- Employees of corporations that have adopted the NPS can join through their employer’s scheme.
5. Unorganized Sector Workers
- Workers in the unorganized sector, who are not covered by other retirement schemes, can also join the NPS through the Swavalamban Scheme.
6. Spouses
- Spouses of eligible individuals can also open an NPS account in their name.
7. Other Eligibility
- KYC Compliance: Applicants must comply with the Know Your Customer (KYC) norms, which include providing proof of identity, address, and other necessary documents during registration.
How to Register
Register Online
Through the eNPS portal, where you can complete the registration process using Aadhaar or PAN.
Register Offline
By visiting a Point of Presence (POP) such as banks, post offices, or other authorized NPS service providers to fill out the registration form and submit necessary documents.
Process For Withdrawal from NPS at Maturity
According to the NPS calculator, in Tier I, you may take out the whole corpus once you reach the maturity age of 60, but only 60% of that amount would be tax-free since you must buy an annuity for the other 40%.
The annual payment from an annuity remains the same no matter how many years pass. An annuity buyer makes a one-time payment to the insurer, who will then distribute the funds to the buyers over a certain period. To meet the varying requirements of retirees, many annuity options are available. Remember that any annuity payments you get will be added to your other forms of income and taxed accordingly. Also, all of Tier II’s assets are subject to taxation as income in their entirety.
| Life Annuity | Provides a lifetime income at a fixed rate for as long as the member lives |
| Life & Certain | Benefits are guaranteed for 5, 10, 15, or 20 years and continue as long as the subscriber is alive. |
| Life & Repurchase | Benefits are paid out for the rest of the beneficiary’s life, and the original purchase money is returned. |
| Inflation-Linked | Pension amount increases by 3% per year and is paid out for life. |
| Life & Survivor | The partner is likewise protected. Upon the subscriber’s death, the pension continues to be paid to the surviving spouse. |
For more information about your account status, simply carry out the NPS login process, and all the information will be provided.
Conclusion
Retirement planning is difficult since it is difficult to predict how much money you will need to live well in retirement. The amount of this fund may be estimated with the help of several resources, most of which use either an income replacement or an expenditure replacement methodology. To calculate how much money you’ll need for retirement, you should multiply your expected years in retirement by your current yearly costs or income.
However, things may seem more complex than they may seem because of inflation, emergency bills, or a health condition whose prices exceed the coverage provided by your insurance. Choosing the National Pension System (NPS) as your primary retirement savings vehicle and supplementing it with other available instruments to create a retirement corpus that matches your financial goals is a viable option.
