National Pension Scheme is a voluntary contribution-based retirement benefits scheme introduced by the Government of India in January 2004. It aims to provide a regular and secured pension income to the retired individuals of India. Every person registered under the scheme has to open an NPS account and contribute an amount at regular intervals during their employment years.
All the invested money is pooled into a pension fund. PFRDA (Pension Fund Regulatory and Development Authority), the apex body, regulates this fund. PFRDA hires professional fund managers to invest this corpus in various financial instruments. Interest earned from these investments is credited to the respective NPS accounts of individuals. Individuals registered under NPS are allotted Permanent Retirement Account Number (PRAN).
There are primarily two types of NPS accounts:
A tier-I account is a basic account with a restriction on withdrawal. For example, if you have not crossed 60 years of age, withdrawal of only 25% of the contribution is allowed. However, the other 75% must only be for buying the annuity from a life insurer. Annuity refers to the continuous fixed payments made at fixed intervals by the insurer on maturity or death of the insured.
If the individual has reached the age of 60 years, they can withdraw 60% of their contribution. However, the remaining 40% must be utilised to buy annuities from approved life insurance providers.
This is another voluntary savings option that does not have any limit on money withdrawal. One can only open it if they already have a Tier-I account. There is no minimum yearly contribution requirement in the case of an NPS Tier-II account. That said, the contribution made here must be in multiples of Rs. 250. Furthermore, there is no maximum cap set on the contribution that one can make.
Parameters | Tier-1 | Tier-2 |
Minimum account opening balance | Rs. 500 | Rs. 1,000 |
Minimum Annual Contribution | Rs. 1000 (Above this amount, the account holder has absolute discretion about the amount) | No minimum annual contribution is required |
Tax Benefits on Contribution | Tax deductions of up to Rs. 1.5 lakh under Section 80CCD(1) An additional contribution of up to Rs. 50,000 is also tax free under section 80CCD (1B) | Only government employees are eligible for claiming a maximum tax deduction of Rs. 1.5 lakh |
Withdrawal | Only on maturity (Early withdrawals are allowed only under special circumstances) | There is no restriction on withdrawal |
Tax Applicable on Withdrawal | The entire corpus amount withdrawn upon maturity is tax-exempt | Any amount taken out at maturity is added to the taxable income and taxed accordingly |
Maximum Investment Limit | No limit | No limit |
Here are some of the features of an NPS account which you should be aware of:
Also, Your PRAN or NPS account will remain unchanged regardless of a change in employment, city or state.
Also Read: Tax Rebate Under Section 87A Of The Income Tax Act
Follow the below pointers to understand how Government Pension Scheme works:
Here are some of the benefits of having a pension fund scheme account:
Also Read: Best National Pension Schemes (NPS) in India
NPS accounts can be opened online and offline. Let’s see how this can be done.
Interested individuals can walk into any government or private sector authorised financial institution and open their government pension fund account by submitting the required documents and depositing the opening amount.
Investors can open their NPS account by visiting the eNPS website and registering online and through the Aadhaar card. There is also a payment gateway on the website through which individuals can make the opening contribution through various online payment methods. After completing the registration process, the PRAN of the investor will be generated.
You need the following documents to open an NPS account:
Tax benefits under the Government Pension Scheme are available for individuals, employees, government employees, and companies. So, for convenience, we have divided them into different sections:
Employer’s contribution to the government National Pension Scheme (up to 10% of basic salary + DA) is deductible from the taxable income as a business expense.
There are different withdrawal options available to the government pension fund account holders. However, for each withdrawal option, there are also individual conditions that one must satisfy. It includes:
The following are the rules for different withdrawal options:
There is no restriction on withdrawal from the Tier-II account.
On the unfortunate demise of the holder, the nominee will get an outstanding amount of the corpus. Also, this amount gets full exemption under the law.
You should be aware of the drawbacks of NPS before opting for it. The following are some of the risk factors associated with NPS that you should consider:
As per the latest tax regulations, 60% of the accumulated retirement sum is taxable. It doesn’t enjoy the EEE benefits unlike PPF or EPF.
An NPS account holder is forced to buy a life annuity from a life insurance company. Annuities do not offer enough return to put a barrier against inflation.
NPS account has a longer lock-in period as compared to other investment instruments. One can only withdraw the corpus completely after reaching the age of 60 years.
While the lock-in period is fixed, NPS offers 3 options for premature withdrawal. They are as follows:
The other tax-saving schemes available in the market are PPF or Public provident fund, ELSS (Equity-linked saving schemes), and tax-saving fixed deposits. So, to understand how beneficial NPS can be over other options, a comparison is made in the following table:
Investment | NPS | ELSS | PPF | FD |
Interest | 9% to 12% | 12% to 15% | Guaranteed 8.1% | Guaranteed 7% to 9% |
Lock-in period | Up to retirement | 3 years | 15 years | 5 years |
Risk profile | Market risk | Market risk | No risk | No risk |
Also Read: Income Tax: Allowances, Exemptions And Deductions
If you want to accumulate funds for retirement and have a steady flow of income, you should consider investing in a government pension scheme. Any citizen within the age group of 18 to 60 years is eligible for investing in government pension schemes such as the National Pension Scheme.
Also Read: 9 Best Monthly Income Plans To Invest In 2022
You should consider the following pointers before opting for the right pension scheme fund:
There is no waiting period when it comes to savings. You should start saving for your retirement as soon as you get your first salary. Be it a nominal amount, but the younger you start saving the more secure your future will be. Also, don’t forget to check the tax benefits available for the pension scheme you choose to opt for.
Fund managers play a crucial role in managing the National Pension Scheme Fund. They will allocate the assets to diversify the portfolio so that you get a stable return. They will also periodically review the portfolio to see if the assets are performing well and make changes accordingly if required. The expertise of a fund manager indicates how your fund is going to perform.
NPS scheme offers financial security after retirement. The tax benefits, stable returns and strict monitoring of the working of these funds make it a lucrative investment option. You can easily open an NPS account online or offline and start securing your retirement years starting today!
Ans: NPS is a Central Government Scheme; there are strict guidelines of PFRDA that every pension fund manager has to adhere to. Returns might be low when there is market turbulence, but the safety of these funds has never been in doubt.
Ans: One of the biggest drawbacks of this scheme is that it has restrictions on withdrawals before maturity. Only a limited amount can be withdrawn and that too in exceptional cases.
Ans: Yes, NRIs can open an NPS account subject to the terms and conditions of RBI and other regulatory bodies. They have to go through a separate application process and submit a specific list of documents required to open the account.
Ans: Apart from the deductions available on the investment amount, investors also get exemptions on the maturity amount. This tax treatment is referred to as EEE or exempt-exempt-exempt. However, this applies to only specific financial instruments.
Ans: Different sections offer different maximum deductions as per applicability:
a) Under Section 80CCD(1): 10% of subscribers’ salary having a limit of up to Rs. 1.5 lakh
b) Under Section 80CCD(1B): Up to Rs. 50,000
c) Under Section 80CCD(2): 10% of subscriber’s salary
Ans: The National Pension Scheme is monitored and regulated by the Pension Fund Regulatory and Development Authority of India established under PFRDA Act, 2013.
Ans: The following are some popular pension schemes for government employees:
– National Pension Scheme
– Aditya Birla Sunlife Empower Pension Plan
– Bajaj Life-Long Goal Pension Scheme
– Exide Life Golden years Retirement Plan
– HDFC Life Click 2 Retire
– HDFC Life Personal Pension Plus
– LIC New Jeevan Akshay Pension Scheme
– Reliance Immediate Annuity Plan
– SBI Life Saral Pension Plan
– TATA AIA Life Easy Retire
Ans: The National Provident Fund is a Defined Contribution Fund. Both the employee and the employer make similar contributions towards the individual account upon which the interest is accrued. The accumulated corpus can be withdrawn upon maturity at the retirement age of 60 years by the employee. Any Indian citizen within the age bracket of 18 to 60 years is eligible for the National Provident Fund.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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