What is National Pension Scheme?
NPS is a voluntary retirement savings scheme laid out to allow the subscribers to make a defined contribution towards planned savings thereby securing the future in the form of a Pension. It is both an investment & a tax saver tool mainly for middle-class working Indians.
In order to participate in the NPS plan, users must contribute a minimum of Rs. 6,000 per fiscal year, which can be made in a single payment or as a minimum monthly installment of Rs. 500. The current NPS contribution interest rate is between 8% and 10%.
The Pension Fund Regulatory and Development Authority (PFRDA) oversees the contribution toward National Pension Scheme (NPS). It is open to all workers in the public, private, and even unorganized sectors, except those in the armed forces.
The National Pension Scheme account can be opened by any Indian citizen between the ages of 18 and 60. The National Pension Scheme, which is governed by PFRDA, matures at 60 years of age and has a maximum extension of 70 years.
After three years after account opening, the national pension scheme permits members to take a portion of their contributions, up to 25%, for purposes such as paying for a home, funding your child’s education, or treating serious illnesses & some other situations with valid reasons.
Features of National Pension Scheme:
NPS is a Central government scheme with features such as tax benefits, pension options, and investment & savings. Following are some of them.
- The National Pension Scheme invests in Equity, Debt & Other schemes.
- An investor can choose & allocate where his/her NPS savings must be invested in and at what proportion.
- The investor also has the option to switch fund managers if they are unhappy with the fund’s performance.
- Annualized yields on NPS range between 8 and 10 percent. At times, the fund has also yielded 12% in annual returns.
- The returns from the National Pension Scheme are a lot higher than those from more traditional tax-saving investments like the PPF.
- Under Section 80C of the Income Tax Act, you can deduct up to Rs. 1.5 lakh from your tax bill if you have an NPS. Added Rs. 50,000 benefit is given u/s 80CCD (1B).
- In the case of Tier I a/c, Investors are required to contribute Rs. 6000 annually i.e, Rs. 500 per month. And, in Tier II a/c, The subscribers must pay a yearly contribution of Rs. 2000 and a one-time contribution of Rs. 250.
- In an NPS account, only 60% of the money can be withdrawn after retirement; the remaining 40% must be invested in a pension plan in order to earn a regular pension.
- One is not permitted to withdraw the entire corpus from the national pension system after retirement. And, One can take out money up to three times at five-year intervals during the whole term.
- After having an NPS account for three years in a row, a person can take out up to 25% of the money saved for things like medical care, further education, marriage, buying a home, etc.
Advantages of National Pension Scheme:
The National Pension Scheme allows for freedom because members can pick their own investment and pension scheme options and watch their money increase.
There are both automatic and active choices. With the auto-selection option, the fund manager oversees your investments and makes decisions about how much to invest in equities, corporate bonds, government securities, and alternative investment funds.
That is the best option if you don’t have much experience with asset allocation and want a qualified manager of your investments. However, you can choose the active option if you wish to manage the asset allocation yourself.
Up until the age of 50, you may invest up to 75% of your money in stocks, 5% in alternative investment funds, and the remainder in corporate bonds and government securities.
Under a number of clauses of the Income Tax Act of 1961, NPS provides tax benefits. Under Section 80C, you are eligible for a tax deduction of up to Rs. 1.5 lakh. Additionally, u/s 80CCD (1B), you may deduct 10% of the basic income of the employer that was invested in NPS. Finally, there is an Rs. 50,000 exemption for voluntary NPS payments.
Both the employer and the employee can get a tax break on their contributions to the National Pension Scheme.
Easy Entry & Exit
It is required to make investments in NPS up until the age of 60 as a pension plan. However, after three years from the account’s opening date, partial withdrawals are permitted. The maximum percentage that subscribers may remove from their contributions is 25%.
Premature withdrawal is only permitted in certain situations, such as when paying for a child’s education, buying a home, or in the event of a medical emergency. In the course of the tenure, subscribers may withdraw money up to three times at intervals of five years. Only the Tier I account is subject to these regulations; the Tier-II accounts are not.
The ability to withdraw a portion of your savings to cover emergencies or other monetary needs is one of the main benefits of NPS. After a minimum of 10 years, you can take 25% of your contributions made under the Tier I program. Only three of these withdrawals are permitted, and there must be at least a five-year interval between each one.
In the NPS plan, the retiree is not permitted to take out their whole account balance at retirement. In order to obtain a regular annuity from the PFRDA-registered insurance company, at least 40% of the collected fund must be set aside as required under this scheme. Taxes are not due on the remaining 60% of the accumulated fund.
NPS provides a high level of diversity by investing in both debt and equities. The program offers favorable market-linked returns and aids in protecting your later years.
Investments are being made into a different scheme for NPS. According to the equity allocation guideline, investors may invest up to 50% of their money in stocks. Active choice and auto choice are the two investment alternatives that are accessible.
In contrast to auto-choice, which makes investments based on the risk profile and age of the investors, active-choice gives investors the freedom to select their funds and divide their investments according to their risk tolerance and suitability.
The Pension Fund Regulatory and Development Authority of India oversees the NPS program (PFRDA). Through routine monitoring and open investment standards, the NPS provides subscribers with transparency and dependability.
The NPS account is easy to open and manage. Utilizing your Permanent Retirement Account Number, you can manage your contributions online (PRAN).
There is now a cap on the equity exposures of the NPS plan that ranges from 75% to 50%. This cap applies to government workers to a 50% extent. Beginning the year the investors turn 50, the equity portion will be reduced by 2.5 percent per year within the prescribed range.
As a result, the risk-return equation for investors is balanced, protecting the invested funds from the volatility of the equity market. Compared to other fixed-income plans, this one has better earning potential.
Disadvantages of National Pension Scheme:
Limited Exposure to Equity
NPS limits the percentage of equity exposure after the age of 50 by 2.5% per year. Once a person reaches the age of 60, their equity exposure is cut to 50%. For some, this might not be favorable.
Because the NPS is a pension plan, only a restricted amount and number of withdrawals are permitted before maturity. This could be a challenge if you suddenly find yourself in need of a large sum of money due to a financial emergency.
Reduced Tax Advantage
NPS Investments have tax benefits under section 80C. This benefit is alongside many other benefits as stuffed in 80C. Thus, it is difficult to take benefit from the scheme.
Types of NPS Account:
There are two types of NPS accounts. Each with its own advantages and disadvantages explained below:
Tier I NPS
The amount invested is completely locked until you reach 60 years of age. After maturity (60 years of age), you can withdraw 60% of the amount completely tax-free and the balance 40% will be used as an annuity for your pensions.
Only 25% of the total contributions may be taken prior to the age of 60; the remaining 75% must be used to purchase an annuity from a life insurance company. A series of payments provided at regular intervals of time is known as an annuity.
Annuity plans require the insurer to pay the insured a set amount of money on a regular basis until the insured retires or the plan ends.
Investment in NPS Tier I account gives you 1.5 lakh tax deduction u/s 80C and further 50,000 deduction u/s 80CCD(1B).
In the case of government funds, the employee’s share of the contribution is 10% of the basic income plus the dearness allowance, and the employer also contributes 10%. However, the investor pays Rs. 6000 for the non-government fund, with the option to pay at least Rs. 500 per installment.
Government and corporate bonds make up the majority of the default investments in a government fund. Additionally, stocks, debt securities (both corporate and government), FDs, liquid funds, etc. are the default investments in non-government funds.
For example, Mr.X, a salaried individual who begins depositing Rs 5,000 per month in NPS at age 20 will receive around Rs 1.91 crore in a lump sum at maturity payment and Rs 1.27 crore in annuity value, which will be reinvested in annuities for a monthly pension.
So, at a 6% rate of return, your annuity value of 1.27 crore will yield you Rs.63,768 as a monthly pension.
Tier II NPS
A voluntary savings & investment account with flexible investment and withdrawal options. Hence, no tax benefits under this scheme. However, both Tier I & Tier II serve the same purpose in regards to helping you build your retirement corpus.
The initial donation is Rs. 1000, but a minimum monthly commitment of Rs. 250 may also be selected. Additionally, a minimum balance of Rs. 2000 must be kept at the end of the fiscal year.
Equity, corporate bonds, government funds, money market accounts, liquid funds, etc. are all included in the investment.
Tax Benefits under National Pension Scheme:
Under Section 80C of the Income Tax Act, the National Pension System permits tax exemption on contributions paid to the plan up to a maximum of Rs. 1.5 lakh. Additionally, both the company and employee contributions made under the NPS program are eligible for a tax break.
This is a component of U/S 80elf-contribution, 80CCD (1). A tax exemption claim may be made for a maximum deduction of 10% of the salary under this clause. This cap is set at 20 percent of self-employed taxpayers’ gross income.
The contribution provided by the employers to the NPS program is covered in section 80CCD (2). Taxpayers who are self-employed are not eligible for this benefit. The lowest of the following amounts is the highest amount eligible for a tax exemption: a. The employer’s actual NPS contribution b. 10% of Basic Amount + Dearness Allowance Gross Domestic Product (GDP)
Under section 80CCD (1B), you may deduct any additional personal contributions (up to Rs 50,000) as a tax benefit for the National Pension Scheme (NPS).
NPS Account for NRI:
All NRIs (Non-Resident Indians) are eligible to open NPS accounts and utilize all of their perks. The government of India introduced the NPS, a retirement savings program, with the goal of ensuring a person’s financial security after retirement. The following are the requirements for NRIs who want to open an NPS account.
- The person should be between the ages of 18 and 60.
- The person must comply with the KYC requirements.
- Person of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) are not qualified.
- Either an NRE or NRO account should be used to fund the national pension system.
The National Pension Scheme is best for people who don’t know how to manage their investments or don’t have the time to do so. The National Pension Scheme Account may be opened by anyone between the ages of 18 and 60.
Any person who wants to plan their early retirement but does not want to incur excessive risks should unquestionably choose an NPS because it is a wholly government-backed program. Salaried individuals should think about the National Pension Scheme if they wish to maximize their 80C deductions.
Your Savings in NPS is invested in Equity & related products, Corporate & government debt instruments, Others, etc. Basically, NPS is a well-diversified investment scheme in itself with added benefits such as tax deductions & pensions options. Hence, it’s a suggested scheme for every working-class Indian.
For More Information, Click on this link – “National Pension System Trust“.
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Disclaimer: All the information on this website is published in good faith and for general information purposes only.