For some of us, retirement planning may be the last thing on your mind. But did you know that the earlier you start planning for your retirement, the better off you will be in the long run? The National Pension Scheme (NPS) is a savings scheme designed to help individuals plan for their retirement. It allows you to contribute a small amount of your income every month towards your retirement fund, which can help you build a sizable corpus over time. In this way, the National Pension Scheme offers you the opportunity to plan for a secure and comfortable retirement, right from a young age.
In this article, we will explore the basics of NPS and how it can help you achieve your retirement goals.
What is NPS (National Pension Scheme)?
The government sponsors the National Pension Scheme (NPS), which enables individuals to contribute regularly during their working life. Depending on the investor’s risk tolerance, the accumulated corpus is invested in equity, corporate bonds, and government securities. A National Pension Scheme offers tax benefits, a variety of investment options, and a regular income in retirement, making it an attractive investment choice.
What are the Types of NPS Accounts?
NPS (National Pension System) offers two types of accounts:
- Tier-I Account: Those who wish to join the NPS must open this mandatory account, which is the primary account for the NPS. Contribute to this pension account during your working life, and you will receive a pension upon retirement. This account has certain restrictions on withdrawals and provides tax benefits under sections 80C and 80CCD(1).
- Tier-II Account: This is an optional account that can be opened by individuals who have a Tier-I account. It is a voluntary savings account that allows individuals to withdraw their savings as and when required. Unlike Tier-I, there are no restrictions on withdrawals from this account. However, it does not offer tax benefits like a Tier-I account.
Note: Those who joined the National Pension Scheme before 1st January 2004 have a third type of account called Tier-III, but individuals who joined after that date do not have access to it.
What is the NPS Eligibility and Enrollment Process?
The National Pension Scheme is open to all Indian citizens between 18 and 65 old. Subject to certain conditions, NPS allows Non-Resident Indians (NRIs) to join. The enrollment process for the NPS scheme is quite simple. An individual can enrol in NPS by following the steps mentioned below:
- Choose the type of account you want to open: Tier I or Tier II. Tier I is a mandatory account while Tier II is a voluntary savings account.
- Open NPS accounts through a Point of Presence (PoP) approved by the Pension Fund Regulatory and Development Authority (PFRDA).
- Fill out the registration form, providing personal details and bank account information.
- Submit the form along with other personal documents like proof of identity and address to the PoP.
- Make the initial contribution to National Pension Scheme via cheque or a demand draft.
- Start contributing regularly to your NPS account at your convenience.
How to Open a National Pension Scheme Account?
The National Pension Scheme is a government-backed retirement savings scheme that offers attractive interest rates and tax benefits. Here is a step-by-step guide on how to open an NPS account- online and offline.
To open an NPS account online, you need to follow these steps:
- Go to the eNPS website.
- Click on “Registration”.
- Enter your personal details, such as your name, date of birth, PAN, and Aadhaar number.
- Upload your photograph and signature.
- Select your preferred pension fund manager.
- Make an initial contribution of Rs. 500.
- Click on “Submit”.
Once you have submitted your application, you will receive an email with your Permanent Retirement Account Number (PRAN). You can use your PRAN to log in to your NPS account and start contributing.
Here are some of the documents that you will need to open an NPS account online:
- Aadhaar card
- PAN card
- Bank account details
Your NPS account will be activated once your KYC is verified, and you can start making contributions and managing your investments online through the National Pension Scheme portal.
To open an NPS account offline, you need to follow these steps:
- Find a Point of Presence (POP). A POP is a bank or financial institution that has been authorized by the National Pension System Trust (NPS Trust) to open NPS accounts. You can find a list of POPs on the National Pension Scheme Trust website.
- Collect the registration form. You can collect the registration form from the POP. The form is available in both English and Hindi.
- Fill up the registration form. You need to provide your personal details, such as your name, address, date of birth, and PAN number. You also need to provide your bank account details.
- Submit the registration form along with the required documents. The required documents include a copy of your Aadhaar card, PAN card, and photograph.
- Pay the registration fee. The registration fee is Rs. 200.
- Get your NPS account number. Once your application is processed, you will receive your NPS account number. You can use this number to make contributions to your NPS account.
Here are the documents required to open an NPS account offline:
- Aadhaar card
- PAN card
- Voter ID card
- Driving license
- Ration card
- Bank statement
- Proof of address
How NPS Returns are Calculated?
National Pension System returns are calculated based on the performance of the underlying investments made by the Pension Fund Managers (PFMs) chosen by the subscriber.
The National Pension Scheme offers two investment options to subscribers – Active choice and Auto choice.
Under the Active choice, subscribers can choose to allocate their contributions across four different asset classes – Equity (E), Corporate Bonds (C), Government Securities (G) and Alternative Investment Funds (A) – in any proportion they desire, subject to certain limits. The returns are calculated based on the performance of the selected assets and the proportion invested in each asset class.
However, under the Auto choice, the allocation of funds is automatically managed based on the age of the subscriber. The Life Cycle Funds divide the allocation into three categories – Aggressive, Moderate, and Conservative – and invest in a mix of different asset classes. The system automatically manages the allocation based on the subscriber’s age, assigning a higher proportion of equity investments for younger subscribers and a higher proportion of debt investments for older subscribers. The subscriber’s chosen Life Cycle Fund determines the calculation of returns.
The Pension Fund Regulatory and Development Authority (PFRDA) regulates the PFMs managing the funds, and they are obligated to disclose the performance of the funds on a regular basis.
What are the Benefits of National Pension Scheme?
National Pension Scheme offers several benefits to its subscribers, including tax benefits, market-linked returns, and flexibility in investment options. Let’s discuss the nps tax benefits in detail.
- Tax Benefits under Section 80C and Section 80CCD(1B): Subscribers of NPS can avail of tax benefits under Section 80C of the Income Tax Act, which allows for a deduction of up to Rs. 1.5 lakh from the taxable income. The National Pension Scheme also offers an exclusive deduction of Rs. 50,000 under Section 80CCD(1B).
- Additional Tax Benefits for Salaried Employees under Section 80CCD(2): Salaried employees who contribute to NPS schemes can receive an additional tax benefit of up to 10% (basic salary + dearness allowance) under Section 80CCD(2). This benefit is in addition to those available under Section 80C and Section 80CCD(1B).
- Market-linked Returns: NPS investments are market-linked, and the returns on NPS investments are based on the performance of the underlying NPS funds. Historically, NPS investments have yielded higher returns than traditional savings accounts and fixed deposits making it an appealing investment option.
- Flexibility in Investment Options: NPS scheme offers subscribers the flexibility to choose their investment options based on their risk appetite and investment goals. Subscribers can choose from two investment options- active choice and auto choice.
- NPS Interest Rate: The NPS interest rate is determined by the performance of the underlying NPS funds. The average returns on National Pension Scheme investments have been around 10% over the last few years, making it an attractive investment option for long-term financial planning.
What are the Benefits of NPS for Corporate Employees?
The employer plays a crucial role in contributing to the National Pension Scheme (NPS), which can benefit corporate employees in several ways.
FACT: Employers can contribute up to 10% of the employee’s basic salary and dearness allowance towards the NPS account.
Here are some of the key benefits of NPS for corporate employees:
- Tax Benefits: Corporate employees who contribute to NPS can avail of tax benefits under Section 80C and Section 80CCD(1B) of the Income Tax Act. This allows them to save a significant amount of tax on their income.
- Retirement Planning: National Pension Scheme helps corporate employees plan for their retirement by providing a reliable and low-cost investment option. It allows them to accumulate a corpus over a period of time, which they can use to generate a regular income after retirement.
- Flexibility: Corporate employees can choose from various investment options under the NPS scheme, including equity, debt, and government securities. This allows them to invest according to their risk appetite and financial goals.
- Low Cost: NPS has a very low-cost structure, with the fund management charges being one of the lowest in the industry. This makes it an attractive option for corporate employees looking to invest in a cost-effective manner.
What is the Difference Between Corporate NPS and Individual NPS Accounts?
Here we have listed some of the basic differences between Corporate NPS and Individual NPS account for better understanding.
|Parameters||Corporate NPS Account||Individual NPS Account|
|Eligibility||Employers and employees of corporate entities||Any Indian citizen aged between 18 and 65 years|
|Investment Options||Only a Tier-I account is available||Both Tier-I and Tier-II accounts are available|
|Contribution Limits||No limit on the contribution amount||Maximum annual contribution limit of Rs. 2 lakhs|
|Contribution Source||Employer, employee, or both||Only the account holder can make contributions|
|Tax Benefits||Tax deduction for both employer and employee contributions||Tax deduction for personal contributions under Section 80CCD(1B)|
|Withdrawals||Partial withdrawals are allowed for certain purposes||Limited withdrawals are allowed only after the completion of 3 years|
|Portability||Account can be transferred to another employer’s corporate NPS account||Account can be transferred to another individual NPS account|
|Annuity Purchase||The employer can purchase an annuity plan on behalf of the employee||The account holder must purchase an annuity plan upon retirement|
What are the Benefits of NPS for Government Employees?
The NPS-G (NPS for Government Sector) is a pension scheme designed for the central government, state government, and other government organizations’ employees.
Under the NPS for Government Sector, government employees can contribute towards their retirement savings and receive a pension after retirement. They can access their NPS account through the Central Recordkeeping Agency (CRA) system and can monitor their contributions, investment performance, and make withdrawal requests through the online portal.
Here are some key features of NPS for the Government Sector:
- Mandatory for New Employees: It is mandatory for all new government employees (except for the armed forces) who joined service on or after January 1, 2004, to become members of the NPS.
- Tier-I and Tier-II Accounts: The Tier-I account is mandatory and meant for retirement savings, while the Tier-II account is optional and provides flexibility in withdrawals.
- Investment Options: Under the Active choice, employees can decide how to allocate their contributions across different asset classes. The allocation is managed based on the employee’s age under the Auto choice.
- Employer Contributions: The government also contributes towards the employee’s NPS account. The Tier-I account receives a deposit of 10% of the employee’s basic salary and dearness allowance as the employer’s contribution.
- Tax Benefits: Contributions made by government employees towards the NPS are eligible for tax benefits under Section 80CCD(1) of the Income Tax Act, 1961.
What is the Taxation Policy on NPS Accounts?
The National Pension System (NPS) is a retirement savings scheme that offers tax benefits to its subscribers. The tax benefits on NPS accounts are as follows:
- Employees: Employees who contribute to NPS are eligible for a tax deduction of up to 10% of their salary (basic + DA) under Section 80 CCD(1) of the Income Tax Act, 1961. This is within the overall ceiling of Rs. 1.5 lakh under Section 80 CCE of the Income Tax Act.
- Employers: Employers who contribute to NPS on behalf of their employees are eligible for a tax deduction of up to 10% of the employee’s salary (basic + DA) under Section 80 CCD(2) of the Income Tax Act. This is over and above the deduction of Rs. 1.5 lakh available under Section 80C of the Income Tax Act.
- Self-Employed Individuals: Self-employed individuals who contribute to NPS are eligible for a tax deduction of up to 10% of their net income under Section 80 CCD(1B) of the Income Tax Act. This is over and above the deduction of Rs. 1.5 lakh available under Section 80C of the Income Tax Act.
The NPS Tax Benefits on Withdrawals are as follows:
- Withdrawals before 60 years of age: Withdrawals made before the age of 60 are taxable as per the income tax slab applicable to the subscriber.
- Withdrawals after 60 years of age: Withdrawals made after the age of 60 are tax-free up to 40% of the corpus. The remaining 60% is taxable as per the income tax slab applicable to the subscriber.
The tax benefits on National Pension System are a great way to save for retirement. By contributing to NPS, you can save on taxes and build a strong retirement corpus.
What is the Withdrawal and Exit Process?
Initiating the withdrawal process from the National Pension Scheme is possible upon reaching the age of 60 or completing 10 years of account opening, whichever occurs earlier. Upon maturity, the NPS account holder can choose from the following options:
- Lump-Sum Withdrawal: The account holder can withdraw up to 60% of the accumulated corpus as a lump sum at maturity. A PFRDA-approved annuity service provider must be used to purchase an annuity plan with the remaining 40% of the corpus.
- Annuity Purchase: An individual can use the entire corpus to purchase an annuity plan from a PFRDA-approved annuity service provider. The annuity plan will provide the account holder a regular income stream for the rest of their life.
- Combination of Lump-sum Withdrawal and Annuity Purchase: The account holder can choose to withdraw a portion of the accumulated corpus as a lump sum and use the remaining portion to purchase an annuity plan.
Conditions for Premature Withdrawal
The NPS account holder can also make premature withdrawals under certain circumstances, such as:
- Partial Withdrawal: The account holder can withdraw up to 25% of the contributions made by them after completion of 3 years of account opening, for specific purposes such as medical treatment, higher education, home purchase, or marriage.
- Superannuation: If the account holder retires from employment after attaining the age of 60, they can withdraw up to 60% of the accumulated corpus as a lump sum and use the remaining 40% to purchase an annuity plan.
- Critical Illness: In case of a critical illness, the account holder can withdraw up to 25% of the accumulated corpus after the completion of 3 years of account opening.
To Wrap It Up…
In conclusion, the National Pension Scheme (NPS) is a great investment option for individuals looking to secure their retirement. With its attractive features such as low cost, flexibility, tax benefits, and potentially high NPS returns, it offers a great investment avenue for individuals across various income levels. You can easily opt for NPS online.
By investing regularly in NPS, individuals can accumulate a substantial corpus for their retirement, and enjoy the benefits of a regular income stream after retirement. With the option of choosing between different fund managers and investment options, NPS provides the flexibility to choose a plan that aligns with individual financial goals and risk appetite. Overall, NPS is a reliable and effective investment tool. As it can help individuals secure their financial future and lead a comfortable retired life.