Pension plans play a very important role during our old age when we do not have a stable and regular source of income.
It provides stability and financial security and also ensures that you live your life with pride without affecting your standard of living.
Pension plans motivate you to accumulate savings and invest the funds so that you spend your retirement happily and fulfill all your dreams and goals.
In India, improvement in sanitation and health facilities in the last decade has increased the lifespan.
Moreover, rising inflation and cost of living makes retirement planning an important decision.
The government of India, in order to provide social security to more number of people, have started National Pension Scheme.
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.
During the time of exit from NPS scheme, the subscribers have an option to use the fund either to purchase a life annuity from PFRDA impaneled life insurance company or to withdraw a part of the accumulated fund as a lump sum.
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Tier I account is mandatory in nature, which can only be withdrawn if you meet the specified conditions under NPS.
On the other hand, Tier II account is an add-on to Tier I account where the individual is allowed to withdraw the savings from this account.
Who can join NPS?
An Indian citizen between the age of 18-60 years, whether resident or nonresident, 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.
The subscriber is required to open an account and get a Permanent Retirement Account Number (PRAN).
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.
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.
4. Tax benefits
An exclusive tax deduction is available for the investments made under NPS scheme (not possible for any other investment). 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.
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.
Click here to register online
The documents required to be submitted to the Points of Presence (POP) in order to open an NPS account are stated below-
1. Registration form (completely filled)
2. Address and identity proof
3. Age proof
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Various fund management schemes available:
There are two ways to invest subscriber’s money which are stated below-
1. Active choice– Under this, the subscribers select the asset class to allocate the fund along with the percentage.
2. Auto choice– It is the default option under the NPS scheme, where the fund management and allocation are done based on the age profile.
The subscribers who decide to leave the scheme before retirement (before age 60) are required to invest 80% of their total savings in a life annuity with IRDA approved insurance company.
However, the individual is allowed to withdraw the remaining 20% as a lump sum.
At the age 60 (on retirement), the individuals can withdraw 60% as a lump sum but are required to invest at least 40% of their pension fund in an annuity.
However, the account gets closed at the age of 70 and the complete benefit is transferred to the individual as a lump sum.
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.
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.