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National Pension System (NPS)
Introduction
Although the retirement age in India is not defined, given the current life expectancy of men and women, the standard norm is anywhere between 58-60 years. Now, when a person is working, they’ll be having a proper cash flow every month. But this stable income stops when you hit the retirement age.
While some people get monthly pensions even after retirement, others have to survive on their savings, or may have to find some easy work to keep them going. This is because, when people retire, they’ll endure some tough financial hardships. So, to support retirees during such a period, the Indian government came up with a scheme called NPS (National Pension Scheme).
Define NPS
NPS or National Pension System is a scheme designed by the Indian government to help people live a better life post their retirement age. It was started on January 1, 2004 but became official for all categories from May 1, 2009. Now, whatever industry you are working in, private or public, organized or unorganized, you can apply for the NPS. The main agenda of this scheme is to protect and support retired people financially. So, how much can one invest in this scheme? And how many types of NPS are there? Let's go a bit further into this concept to know this.
How does NPS work?
The NPS scheme is for all classes, irrespective of the employee category he or she falls under. The minimum investment one can make in this scheme is Rs 6000 yearly, and this can be invested either lump sum or in installments. If you go with the latter option, you’ll have to invest Rs 500 per month, which accounts to the minimal value.
The NPS investments are invested in multiple securities, both equity and debt, depending on the market performance and returns. The ideal age group to invest in NPS stands between 18-65 years. This scheme is classified into two categories, namely, government sector and non-government sector. The former category states that any government employee who has enrolled in NPS since the start or post the scheme date falls under this umbrella. The NPS contribution is made monthly by both the employer and employee.
The latter category consists of both corporates and Indian citizens. As the size of one company differs from another, NPS brings customization into play. This allows every company to invest in this scheme. If the respective person doesn’t fall in any of the above categories, they can get themselves registered as an individual under the revised NPS date, i.e., on May 1, 2009.
Types of NPS accounts
The NPS is broadly categorized into two types based on the city or residence: Tier 1 and Tier 2.
NPS Tier 1 Account − Once you get registered with the NPS and become a subscriber, you’ll be given a unique PRAN number or Permanent Retirement Account Number. The subscriber makes necessary contributions through the working period until retirement. One can open the NPS account with a minimum investment of Rs 500.
The annual contribution should be a minimum of Rs 1000. However, there’s no limit for maximum investment. The maturity ends as and when you quit the scheme. One can earn interest on NPS investment of anywhere between 8% to 10% respectively.
You can either withdraw up to 60% of the invested amount upon retirement, which will be totally tax-free. Or, go for premature withdrawal, where it allows the subscriber to take out 25% of the investment after 3 years for emergency or personal reasons.
NPS Tier 2 Account − Without having a Tier-1 account, you cannot open a Tier-2 account. The subscribers can easily move from one account to another based on their financial needs. The initial investment to start this account is Rs 1000. However, the subscriber has to invest in this account only in multiples of Rs 250. One can deposit or withdraw as per their convenience, and you’ll not be levied with any fee upon multiple withdrawals.
Benefits of NPS
The NPS scheme offers several benefits to the subscribers, below are a few of them.
Easy Entry and Exit − Any person can open an NPS account and invest in it. There are no entry rules except to meet the age criteria (18 - 65 years). You can quit the scheme anytime you want. Also, you are allowed to make partial or premature withdrawals as per your financial requirement.
Risk Assessment − Investing in equities can be risky but it certainly attains sound returns if you hold on for a period. Initially, the equity range for NPS lies between 50% and 75%. The equity value cuts by 2.5 yearly from the day the subscriber reaches 50 years.
Returns and Interest − The NPS funds are invested in both equity and debt securities. Since a part of the funds are parked in equities, they garner considerable returns of 9% - 12% as opposed to other tax-saving investments. This avenue is perfect for people who want to grow their savings, aggregate their wealth, and for portfolio diversification.
Simple and Flexible − This scheme offers investment flexibility, where the subscriber can invest as much as they want, either less or more, depending on their financial situation. Whether you want to start your retirement planning journey or save for a future goal, NPS offers a mix of security and growth.
Regulated − The NPS or National Pension Scheme is managed and administered by the Pension Fund Regulatory and Development Authority of India (PFRDA).
Tax Aspects for NPS
Apart from all the benefits stated above, people majorly invest in NPS for tax advantage. All the gains obtained from NPS Tier 1 are considered as tax-free. They can get a tax benefit of up to Rs 2 lakhs in this case. As per the IT Section 80 CCD, you can claim a tax benefit of up to Rs 1.5 lakhs. And as per the IT Section 80 CCD (1B), you can gain an extra tax benefit of Rs 50,000. If the contribution exceeds Rs 2 lakhs, you are charged under Income Tax.
Conclusion
Not everyone gets pensions after retirement, so, the government came up with a supporting scheme for people to save for their retirement called National Pension Scheme or NPS. The main agenda of this scheme is to aid people to save better during their initial working days to lead a secured post-retirement life with those savings. The initial investment in NPS is Rs 6000, which can be invested either wholly or in installments. Another benefit of investing in NPS is that the investor gets equity exposure indirectly.
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