Retirement planning plays an important role in securing our future from a financial perspective.
This makes it a significant element of financial planning that we should all focus on.
One of the components of retirement planning is a pension.
Our pension plans play a very important role during our old age when we do not have a regular source of income.
They provide stability and financial security and also ensure that we live a good life in retirement, without lowering our standards of living.
Keeping this in mind, the Government of India has set up many schemes to help people plan their retirement early and peacefully.
One of these is the National Pension Scheme or NPS.
National Pension Scheme (NPS)
National Pension Scheme (NPS) is a voluntary, low cost and defined contribution retirement savings scheme, designed to enable systematic savings during the working life of the individual.
It attempts to provide a solution to make available sufficient retirement funds to every citizen of India.
NPS was launched on 1st January 2004 to create and regulate pension sector in the country and to inculcate savings habit for retirement among the citizens.
It is designed based on a defined contribution basis, where the individual contributes to his account.
How NPS works?
The savings of individuals are pooled in a pension fund, which gets invested by PFRDA regulated professional fund managers according to the stated investment guidelines.
Over the years, these contributions would accumulate and grow depending upon the returns generated on the investments.
Some of the key features of retirement account under National Pension Scheme are stated below-
a. PRAN card:
The subscribers receive a Permanent Retirement Account Number (PRAN) card which has a 12-digit unique number.
b. Tier I and Tier II account:
There are two sub-accounts under NPS account- Tier I and Tier II.
- Tier I account: This is the default account of the scheme. Upon registration, opening this account is compulsory.Withdrawals in this account have restrictions. Under section 80C and 80CCD of the Income Tax Act, 1961, you can avail a tax exemption of up to Rs. 1.5 lakhs.The minimum contribution here is Rs. 1000 per annum.
- Tier II account: This is a voluntary account under which allows its holders to invest and withdraw their funds from the investment schemes of NPS, with no extra charges. Unlike a Tier I account, this account has a tax exemption of up to Rs. 1.5 lakhs that is only available for Government employees. There is no minimum contribution or balance required on this account.
Who can join NPS?
An Indian citizen between the age of 18-65 years, whether resident or non-resident, can join NPS either as an individual or as an employer-employee group subject to KYC documentation and submission of relevant information.
Once you have attained 60 years of age, you cannot further contribute to the NPS accounts.
- Simplicity: The subscriber is required to open an account and get a Permanent Retirement Account Number (PRAN).
- Transparency: It’s a cost-effective and transparent scheme, where the contributions are invested in a pension fund scheme and the individual can check the investment value on a daily basis.
- Portability: Each individual is allotted a unique number called Permanent Retirement Account Number (PRAN), through which he/she will be recognized and it will remain the same even if the individual gets transferred to any other office.
- Tax benefits:An exclusive tax deduction is available for the investments made under NPS scheme (not possible for any other investment). Account-holders can avail a tax exemption of 10% of their gross income or ₹ 1,50,000, whichever is lower. According to the amendments made in Union Budget from F.Y. 2015-16, NPS subscribers can avail a tax deduction of additional Rs 50,000 under section 80CCD, in addition to the deduction of Rs 1,50,000 under 80 CCE. These tax deductions are only available for the money in the Tier I account.
Where and how to open NPS account?
National Pension Scheme is spread through authorized entities known as Points of Presence (POP), where most banks (including public and private) are registered to act as POP under the NPS scheme, apart from other financial institutions.
In order to invest in NPS, you are just required to open an account through Points of Presence (POP), who will help you in opening the account including providing information about the scheme, assisting in filling the necessary forms, etc.
- Find a Point of Presence (PoP) that’s nearest to you. You can locate it here.
- Collect and fill the subscriber form and submit it with the required KYC papers (address, age and identity proof).
- Make a minimum initial investment, if required.
- After doing so, you will receive a welcome kit, which will include your Permanent Retirement Account Number (PRAN) and a password to log in to your account online.
- Go to the official website of the National Pension System Trust.
- Click on the “National Pension System” to be led to the official registration page.
- Choose the type of account you want. Tier I is compulsory, while Tier II is optional. We will discuss these in detail later.
- You will receive an OTP to validate your registration. Use this OTP to generate your PRAN and password to your account.
The documents required to be submitted to the Points of Presence (POP) in order to open an NPS account are stated below-
- Registration form (completely filled)
- Address and identity proof
- Age proof
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Various fund management schemes available:
There are two ways to invest subscriber’s money which are stated below-
Active choice– Under this, the subscribers select the asset class to allocate the fund along with the percentage.
Auto choice– It is the default option under the NPS scheme, where the fund management and allocation are done based on the age profile.
There are two possible cases –
After investing in the scheme for a minimum of three years, you can withdraw up to only 25% of the total funds deposited.
You can make such a withdrawal for three times at a gap of 5 years, during your entire tenure.
These restrictions are only for Tier I accounts. As mentioned before, withdrawals of all kinds are permitted in Tier II accounts.
Withdrawal after 60 years of age:
After 60 years of age, you are not allowed to deposit any money in the scheme. Now, you are allowed to utilize the funds in your account.
Here is the distribution of the total funds –
60% of the total funds are now your tax-free corpus. You can use it as you like.
40% of the funds have to be kept aside; they will be used to give you a regular pension amount from a firm registered under PFRDA (Pension Fund Regulatory and Development Authority).
In case of death of the individual, the nominee receives the total amount as a lump sum.
National Pension Scheme is looked upon as a better option in terms of equity exposure and cost.
Moreover, it allows to plan for your retirement in a disciplined way and also provides additional tax benefits.
After knowing the details of the NPS, there is an important question to answer – is this scheme a good option for us?
NPS is a great option for someone who is looking to build a retirement corpus with minimum risks, and in a systematic manner.
Along with tax-saving opportunities, it also gives the account holder an opportunity to grow their wealth through investments in the stock market.
However, there is a little concern over liquidity and tax at maturity due to which people are reluctant to invest their fund.
Hence, talk to a concerned professional and do your own research before investing in NPS.