What is NPS?
The National Pension Scheme, or NPS, is a government-owned social security investment option open to all Indian citizens in the age group of 18 to 70 years in the private, public, and unorganised sectors. The scheme allows individuals to invest a percentage of their income on a regular basis and get an annuity once they are 60. When the investor turns 60, he/ she can make exit from the scheme. However, 40% of the accumulated wealth has to go towards the purchase of an annuity.
There is no minimum or maximum investment amount. The subscribers may withdraw a portion of the accumulated financial corpus as retirement age draws near. The remaining amount will be provided as a standard pension. The additional NPS contributions that are deposited are invested in various securities, investment vehicles, and equity markets as suitable. The current interest rate ranges from 9% to 12%, depending on the chosen scheme.
There are two types of NPS accounts- Tier I and Tier II. Tier I accounts are used to save for retirement, whereas Tier II accounts can be used to save for unexpected expenses.
Tier I
To participate in NPS, you must first open a Tier I NPS account. This account's withdrawals are limited and subject to conditions. With a deposit of as little as INR 500, you can open a Tier I NPS account. You must contribute at least INR 1,000 yearly to keep the Tier I NPS account active.
Tier II
The opening of a Tier II NPS account is optional and may be done concurrently with or after the opening of a Tier I NPS account. This account is always available for withdrawals.
Opening a Tier II NPS account requires a minimum initial contribution of Rs. 1,000. The Tier II NPS account does not require any minimum yearly deposits to be active.
What are the benefits that you can expect with NPS?
For people who desire to plan for their retirement, NPS offers a methodical saving route. This scheme offers numerous benefits, making it one of the most popular investment schemes among investors.
The following are the benefits of investing in the NPS scheme:
NPS is rather simple to understand:
The money you invest in the NPS scheme is compounded and given back to you as a pension for your whole retirement phase, acting as a saviour when you most need financial support.
NPS Offers Flexibility:
The NPS scheme gives the investor the freedom to create the fund portfolio however they see fit. Investors can divide their money across four different assets based on their level of risk tolerance. If the investor is dissatisfied with the performance of the fund or believes it is not performing as planned, the funds can be rearranged at any moment.
NPS provides Seamless Portability:
NPS offers hassle-free arrangements for individual subscribers as they relocate or change jobs without having to leave behind the corpus built, as is the case with many pension systems in India.
When you open an NPS account, you are issued a PRAN number, which serves as your pension account's unique identification number. With this PRAN number, you can access your pension account from anywhere. You can use this PRAN number, just as your EPF account number, in your new position to ensure that the pension payment is credited to the same amount. This makes it possible to manage the investor's corpus in an efficient manner.
Pocket-friendly way to Invest:
NPS investment can be started with a very less amount. The minimum amount that must be contributed when an account is opened is INR 500. However, you can contribute as little as INR 1000 each financial year.
Tax benefits3
This is yet another significant aspect of the NPS. Three sections of the Income Tax Act of 1961—80CCD(1), 80CCD(1B), and 80CCD(2)—allow tax benefits for NPS during the investment stage. Investments in the NPS up to INR 1.5 lakh are tax-deductible under section 80CCD(1). However, keep in mind that section 80C's overall cap is INR 1.5 lakhs.
An extra investment of INR 50,000 above INR 1.5 lakhs allows for tax deduction under the NPS under Section 80CCD (1B). Aside from these, employer contributions of up to 10% of basic salary + DA qualify for tax deduction under section 80CCD (2).
You can Easily Access your Account:
NPS offers a very extensive web platform that allows individuals to completely create and manage their NPS account online. With the help of eNPS, a user-friendly portal, you can manage your NPS account and also avail a variety of features, all from the comfort of your home.
Ideal for People with a low-risk Appetite:
NPS has a relatively low-risk profile when compared to other investment opportunities. Furthermore, because it is a government-owned scheme, the risk cap on the stocks ranges from 50% to 75%. Being market-linked, the long-term savings in the NPS can offer you returns that beat inflation.
Conclusion
Everyone envisages their retired life to be relaxed, laid back, and carefree. While your retirement can offer you a lot of freedom and time for yourself to bare the fruit of all your life’s hard work, you need to have enough to sustain your second innings as well. National Pension Scheme is a retirement plan that provides you with a regular inflow of income once you retire. Make sure you understand all the aspects of NPS and make the most of this scheme.
References
https://economictimes.indiatimes.com/wealth/invest/10-reasons-why-you-should-choose-nps-for-your-retirement-planning/articleshow/94397373.cms 4
https://www.livemint.com/money/personal-finance/should-you-invest-in-nps-just-for-the-tax-benefits-11635318201441.html 5
https://economictimes.indiatimes.com/tdmc/your-money/what-is-national-pension-system-and-how-it-works/articleshow/52322912.cms 6
https://cleartax.in/s/nps-vs-ppf 7
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2 February 2023
5 mins read
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