NPS (National Pension System) is a government-backed retirement savings scheme in which Indian citizens (including NRIs) are eligible to invest. NPS is a market-linked voluntary investment scheme that enables you to build a significant retirement corpus by investing in a pension account during your work-life years. It also gives you the flexibility to choose among different investment options managed by experienced and professional fund managers.
Why invest in NPS?
Saying yes to NPS investment can open the doors to a plethora of benefits, including:
- Flexibility – Active choice approach allows selection of asset class proportion as per your risk appetite.
- High degree of transparency– PFRDA’s regulation ensures regular monitoring & performance review
- Twin income tax benefits– Upto Rs 2 lakh income tax benefit under Section 80C and Section 80CCD (1B)
- Portability – Operate your NPS account from anywhere, despite changes in city/employment.
- Ease of opening an account– Open account through eNPS by visiting the NSDL website or with POPs such as banks.
- Better returns than traditional investments- As a portion of NPS gets invested into equities, returns can be higher.
- Availability of NPS calculator to help you make decisions regarding investment amount,tenure, returns, etc.
All you need to know about NPS
? Flexibility to choose your policy & premium payment terms
? NPS investors get to enjoy twin income tax benefits.
- Firstly, they can claim up to Rs 1.5 lakh tax benefit under Section 80C.
- The second tax benefit is an additional deduction for investment of up to Rs 50,000 in NPS (Tier I account) under Section 80CCD (1B).
? Under NPS, subscribers can choose to invest in two types of NPS accounts: Tier I & Tier II.
Tier I Account | Tier II Account |
This is a mandatory account if you wish to invest in NPS | This is a voluntary savings account |
Offers income tax benefits | Income tax benefits are not applicable |
Some restrictions and conditions apply to withdrawal of funds | Offers higher liquidity through no restrictions on withdrawal of funds |
Can be opened with just Rs 500 as minimum contribution. To keep the account active, you need to deposit at least Rs 1,000 in every financial year | Can be opened with rs 250 as minimum contribution. No minimum balance or deposit is required further to keep the account active |
? Based on the policyholder’s age, NPS funds are invested in the following asset classes under the ‘Auto-choice’ option:
- Equity– Scheme predominantly invests in equity market instruments.
- Corporate Bonds– Scheme predominantly invests in fixed-income instruments such as bonds issued by PSUs.
- Government Securities – Scheme predominantly invests in securities issued by central and state government, and in money market instruments
- Alternative Investment Funds– Scheme predominantly invests in instruments such as MBS, CMBS, REITS, Invlts, AIFs, etc.
In case you want to actively participate in the investment and have a good risk appetite, then you can choose the ‘active choice’ option for NPS investment.
Now let us answer some important questions about NPS:
Q: Who is eligible to invest in NPS?
Any Indian citizen aged between 18 years to 70 years is eligible to invest in NPS. This includes NRIs and overseas Indians as well. However, such citizens should be legally competent to put into effect a contract under the Indian Contract Act, 1872. Also, PIOs (Persons of Indian Origin) and HUFs or Hindu Undivided Families are not eligible to invest in NPS.
- Should you invest in NPS if you already have term insurance?
Yes. The objective of term life insurance, even if it has an add-on rider like critical illness cover, is to hedge against life’s uncertainties. While on the other hand, investing in NPS helps to financially secure your post retirement years.
Q: How does the NPS tier I account differ from the tier II account?
Under NPS, subscribers can invest in two types of accounts: Tier I and Tier II. While the Tier I account is a mandatory retirement account if you wish to begin investing in NPS, Tier II is a voluntary savings account.
Tier I NPS accounts offer income tax benefits, but there are certain restrictions on the withdrawal of funds. On the other hand, Tier II accounts under NPS lack income tax benefits but offer higher liquidity through the absence of restrictions on the withdrawal of funds.
Q: What investment choices are available under NPS?
NPS offers you two investment approaches: Auto choice and Active choice.
Under the active choice approach, an NPS subscriber on his/her own chooses the allocation percentage in asset classes. On the other hand, in the auto choice approach, NPS funds are automatically allocated amongst the available asset classes, as per a pre-defined matrix based on the subscriber’s age.
Q: What help can NPS calculators provide to investors?
Similar to add-on riders such as critical illness in case of insurance, there is an add-on benefit for NPS subscribers too, in the form of an online NPS calculator. This calculator can give investors a fair idea about the pension as well as the lump sum amount which they can expect upon maturity.
?Rules for Exit and withdrawal from NPS
NPS withdrawal rules after retirement (60 years)
NPS investors can withdraw up to 60% of the total corpus as a lump sum, and the remaining 40% goes into an annuity plan. But in case the corpus is up to Rs 5 lakh, it can be fully withdrawn without purchasing annuity.
NPS early withdrawal upon superannuation
- If the NPS investors reach superannuation/the age of 60, they have to utilize at least 40% of the accrued pension corpus towards buying an annuity.
- The remaining corpus remains available for withdrawal as a lump sum. But the entire corpus can be withdrawn if it is up to Rs 5 lakh.
Premature exit
- In the case of a premature exit (i.e. before reaching the superannuation age/turning 60), at least 80% of the accrued pension corpus has to be utilized towards buying annuity.
- If the total corpus is up to Rs 2.5 lakh, a 100% lump sum withdrawal is allowed.
Death of the NPS subscriber
If the NPS investor dies, the entire 100% of the accrued pension corpus gets paid to the legal heir/nominee.
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