National Pension Scheme (NPS) is social security scheme by the Central Government of India. This pension scheme is made open to the public, private, and even the unorganized sectors except those from the armed forces.
The scheme allows people to invest in a pension account at regular intervals during their employment. After retirement, the subscribers can take a certain percentage of the amount. As an NPS account holder, you get the remaining amount as a monthly pension after your retirement.
Earlier, the NPS scheme was covering only the Central Government employees of India. Now, PFRDA has made it open to all Indian citizens voluntarily.
NPS scheme has value for anyone who works in the private sector & requires a regular pension after retirement. NPS scheme is portable across jobs & your locations, with applicable tax benefits under Section 80C and Section 80CCD.
- Who can invest in the NPS?
- Features & Benefits of NPS Investments
- Tax efficiency – NPS tax benefit
- Types of NPS Account
- How to open an NPS account
- NPS Registration
- NPS Contribution Online
Who can invest in the NPS?
The NPS is an excellent scheme for anyone planning their retirement early and has a low-risk profile category. In the retirement years, a regular pension income for those individuals who retire from private-sector jobs will be a great choice and available option.
A systematic investment like NPS can make a big difference in your life after retirement. Salaried people may consider this scheme as an option under 80C deductions.
Features & Benefits of NPS Investments
Returns or Interest
A portion of the amount of the NPS goes to equities (this may not offer guaranteed returns). However, it delivers better returns that are much higher than other known traditional tax-saving investments products like the PPF.
This scheme is now started almost 10 years and it probably has delivered approx. 8% – 10% annualized returns. In NPS, you can change your fund manager if you are not happy with the fund’s performance.
Currently, there has been a cap in the range of approx. 75% – 50% on equity & related exposure for the National Pension Scheme (NPS). For government employees, this cap is 50%. In the field prescribed, the equity portion will reduce by 2.5% each year when the investor becomes 50 years old.
However, for an investor of the age range from 60 years and above, the cap is fixed at 50%. This allocation stabilizes the risk-return equation in the interest of investors who are investing. This means the amount is somehow safe from equity market volatility.
The returns potential of NPS is a bit higher as compared to other fixed-income schemes.
Tax efficiency – Tax benefit
We have a deduction of up to Rs.1.5 lakh to be claimed for NPS – for your contribution and the contribution of the employer side also. – 80CCD (1) have the self-contribution, which is a part of Section 80C.
The maximum deduction can be claimed under 80CCD (1) is 10% of your salary, but not more than the mentioned limit. For self-employed taxpayers, this limit is 20% of their gross or total income.
Section 80CCD (2) covers the contribution from the employer’s NPS, and this will not be a form or a part of Section 80C. This benefit is unavailable to self-employed taxpayers.
The maximum amount is eligible for deduction will be the lowest as per below:
- Your Actual NPS contribution by your employer
- 10% of Your Basic plus DA
- Your Gross total income
You can claim any of the additional self-contributions (up to Rs 50k) under the section of 80CCD(1B) according to NPS tax benefit. The scheme, therefore, allows you a tax deduction of up to a total of Rs 2 lakh.
Withdrawal Rules After 60 ages:
You cannot withdraw the complete money of the NPS scheme after your retirement. You have to keep at least 40% of the corpus to receive a regular pension from a PFRDA.
The outstanding 60% is tax-free. As per the latest update from the central government of India, the entire NPS withdrawal corpus is exempt from tax.
Early Withdrawal and Exit rules:
As a pension scheme, you have to keep investing till the age of 60. However, if you are investing for at least 3 years, you can withdraw a maximum of 25% for specific objectives.
These may include higher studies or children’s weddings, building or buying a new house, or medical treatment for self or family. You can make withdrawal up to three times (with a gap of five years) in the entire duration.
These restrictions are only applicable to tier-I account/s and not on tier-II accounts.
To know more about how to save taxes, click here.
NPS invests in various schemes, and Scheme E of NPS usually invests in the equity category. You may allocate a maximum of 50% of your investment into equities. There are 2 options to invest in – active choice or auto choice option.
The auto choice checks the risk profile of your investments based on your age. For example, the older you are, the more stable and less risky your assets are. The active choice allows you to choose the scheme and to divide your investments.
Options for changing the Scheme or Fund Manager
With NPS, you have the opportunity to change the pension scheme or the fund manager if you are unhappy with their performance. This option is available in tiers I and II accounts.
NPS – National Pension scheme offers 2 types of accounts, namely Tier 1 & Tier 2.
NPS Tier 1 account offers tax-saving options. Under NPS guidelines. Tier 1 has a locking option, and it is a mandatory type of account.
NPS Tier 2 account does not offer a tax savings option. You can withdraw the amount from this account at any point in time. This account type is optional.
How to open an NPS account
PFRDA generally regulates the operations of the NPS, and they offer both an online and an offline option to open an account.
To open an NPS account offline mode or manually, you will have to find the nearest POP – Point of Presence (it can be a bank) first of all. You collect a physical subscriber form from your most immediate POP and then submit it along with the KYC documents.
Once you make the initial payment (greater than Rs.250 monthly or Rs. 1,000 annually), the PoP will send you a PRAN Number – Permanent Retirement Account Number.
This number & password in your packed welcome kit will help you log in to your account. There is a one-time registration fee applicable of Rs.125 for this NPS procedure.
Now, it is possible to open an NPS account in less than one hour. Opening an account online is now much easier. To Open your NPS Account the following things must be handy: PAN Number, Aadhaar Number, Bank Proof, (Cancelled Cheque / Bank Statement or Passbook), Email ID, and mobile number.
You can open your NPS account using the option above.
You can contribute to NPS up to a minimum of Rs.500 at one time and a maximum up to NPS individual contribution of up to Rs. 50,000/-
You can avail yourself of the option to do NPS Contribution to your NPS account using your allocated PRAN – Permanent Retirement Account Number using the following option:
Contribution online option