The National Pension Scheme or popularly known as NPS is a government initiative which enables its subscribers to contribute to their pensions during their working lives. The pension scheme was launched in 2004 and is funded by Govt.
This arrangement requires you to pay at least ₹ 500 for Tier I and a minimum of ₹ 1000 for Tier II initially while you register for the National Pension Scheme. This amount is submitted towards your pension fund to earn retirement benefits. The Pension fund regulatory development authority (PFRDA) is the controlling body of the Pension Fund.
What are the Tax Benefits available?
The NPS shall make tax-exempt under section 80C for the maximum ₹ 1.5 lakh investment. Additional tax exemption of ₹ 50,000 under section 80CCDIB is allowed for the subscribers of the scheme.
What is the Market Status of the pension fund?
NPS is graded as EET, which means the option of an investment exemption is available, an exemption for earnings, but redemption is taxed.
What’s the Eligibility Criteria to join this scheme?
- Citizens of India between the ages of 18 to 60 years at the time of registration can subscribe to this scheme.
- Resident or Non-resident.
What are the Key Rules you should know?
- There is no minimum annual deposit necessary. But to get a reasonable pension after retirement, it is recommended to contribute at least ₹ 1000/yr.
- There is an age limit (18-60).
- Withdrawal of your pension fund is split into a lump sum and annuity scheme at the retirement time.
- Only a maximum of 40% of the overall corpus can be withdrawn tax-free.
- 40% shall be invested in the annuity plan to get regular monthly income pension after retirement.
- The remaining can also be invested in the annuity scheme or withdrawn with tax applicability as a lump sum.
What are the Categories of NPS Accounts?
There are two categories for NPS:
Tier 1 Account
- Tier 1 has premature withdrawal limits. More specifically, the employer contributes to the NPS accounts of workers. Tier 1 is mandatory.
- Wipro was the first private company to introduce employee NPS accounts.
What are the Contribution Mandates?
Govt employees – 10% of basic + DA
The Government makes equal contributions. (For central govt employees, the contribution has been enhanced to 14%).
For others– Minimum ₹ 1000/yr
Note: The employer’s contribution to NPS is over and above EPF.
Tier 2 Account
Tier 2 accounts are more optional, with no withdrawal limits. Opening Tier 1 is mandatory for opening a Tier 2 account.
Some Salient Features
- Savings account
- No Withdrawal restrictions
- No contribution from employers
- No tax rebate
- Joining fee- Rs. 1000
- Minimum contribution: ₹ 250
How can you invest in NPS?
Broadly there are three ways of investing in NPS –
- Corporate Debt
- Govt Securities.
NPS Investment Proportion
The investment ratio in these categories may differ depending on the option and nature of the job. There are three choices available;
- Active choice – The investor determines the share percentage in this option. Here you can add up to a limit of 50 per cent to equity funds.
- Auto Choice – Distribution is carried out by pre-defined rules following the age of the investor.
- Default choice – 55% of your money will be allocated to the Govt securities in this option.
Note: The default option is mandatory if you are a government employee.
Popular Fund Managers to make investments in NPS
- HDFC Pension Management
- ICICI Prudential Life Insurance
- Kotak Mahindra Asset Management
- LIC Pension Fund
- Reliance Capital Asset Management
- SBI Pension Fund
- UTI Retirement Solutions
Where can you open an NPS Account?
NPS account can be opened in:
- Public sector Banks
- Private Banks like HDFC, ICICI etc
- Post Office
Withdrawal from NPS Account
After ten years, you can begin cash withdrawal from your NPS account.
For the following reasons a limit of 25% can be removed after ten years
- Marriage of children
- For children’s Higher education
- A house to purchase or build
- Self, wife or dependent illness
Note: No more than three withdrawals can occur within a gap of 5 years. The gap is not relevant in the case of severe disease.
What is an NPS Calculator?
NPS Calculator is a tool that offers pension fund forecasts that subscribers will receive at 60 years of age. It computes the sum of receivables and interest earned.
- Subscriber’s current age
- Age of Retirement
- Invested amount on a monthly basis
- Rate of Interest
- Interest earned
- Generated Pension wealth
- Total savings of tax
Conclusion: Having a stable and reliable source of income becomes very necessary when you reach your retirement age. You can benefit from voluntary and mandatory pension schemes as per your job profile. We suggest you to start investing in your pension fund as soon as possible to secure your post-retirement life.