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NPS (National Pension Scheme)

National Pension Scheme

NPS (National Pension Scheme)

Planning for retirement is essential to be able to live a comfortable life when you no longer earn a stable monthly income in the form of a salary. It is, therefore, prudent to invest a part of your salary in a retirement plan during your earning years for it to grow into a large retirement corpus. One such investment avenue aimed at retirement planning is the National Pension Scheme (NPS) launched by the Government of India.

Features of NPS

The NPS scheme is run and administered by the Pension Fund Regulatory and Development Authority (PFRDA).

Citizens of India or Overseas Citizens of India (OCIs) can invest in the NPS scheme if they are aged between 18 and 70 yrs. NRIs can invest in the scheme provided they have a valid PAN card and a bank account in India.

There are two types of NPS accounts – Tier I and Tier II account

Particulars

NPS Tier-I Acct    

NPS Tier-II Acct

Status

Default

Voluntary

Withdrawals

Not permitted

Permitted

Min NPS contribution

Rs 500 or RS 1,000p.a

Rs 250

Max NPS contribution

No limit

No limit

Tax exemption

Up to Rs 2 lakh p.a

(Under 80C and 80CCD)

1.5 lakh for govt. employees other employee “ none”

Why invest in the NPS scheme?
  • Easy investment- Investing in the NPS scheme is relatively easy. You can invest online or offline either through PFRDA or through your bank. Many banks are authorised with PFRDA to allow NPS subscriptions. Moreover, the minimum investment amount is low and affordable, making the scheme suitable for every investor.

  • Guaranteed lifelong pensions- The NPS scheme promises lifelong pensions. After the scheme matures, you have the option to withdraw up to 60% of the accumulated corpus in a lump sum. The remaining corpus is, then, used to pay pensions through investment returns from annuities. There are various pension options that you can choose from to customise the pension payments as per your requirements.

  • Economical- NPS is one of the lowest cost investment products available.

  • Portability- NPS account or PRAN will remain same irrespective of change in employment, city or state.

  • Flexibility- the NPS scheme offers flexibility in switching, partial withdrawals, and loan facility. You can switch between the investment strategies as well as between the investment funds. Once three years are completed, you can make partial withdrawals. There is also a loan facility in NPS that you may avail of during your investment tenure. These flexible benefits help you manage your investments at your discretion.

Early Withdrawal and Exit rules

As a pension scheme, it is important for you to continue investing until the age of 60. However, if you have been investing for at least three years, you may withdraw up to 25% for certain purposes.

These include children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others. You can make a withdrawal up to three times (with a gap of five years) in the entire tenure.

These restrictions are only imposed on tier I accounts and not on tier II accounts. Please scroll down for more details on them.

Withdrawal Rules After 60

Contrary to common belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm.

The remaining 60% is tax-free now. The latest update from the government says that the entire NPS withdrawal corpus is exempt from tax.

Comparing NPS scheme with other Tax Saving Instruments

public Provident Fund (PPF) and Tax-saving Fixed Deposits (FD). Here is how they are in comparison to the NPS:

Investment

Interest

Lock-in period

Risk profile

NPS

8% to 10% (expected)

Till retirement

Market related risk

PPF

8.1%

(guaranteed)

15 yrs

Risk free

ELSS

12% to 15% (expected)

3 yrs

Market related risk

FD

7% to 9% (guaranteed)

5 yrs

Risk free

The NPS can earn higher returns than the PPF or FDs, but it is not as tax-efficient upon maturity. For instance, you can withdraw up to 60% of your accumulated amount from your NPS account.

Out of this, 20% is taxable. Taxability on NPS withdrawal is subject to change. 

Overview

NPS scheme can be a tax-effective retirement planning tool. You can invest in the scheme and let the market-linked returns create an optimal corpus for retirement. On maturity, the pensions would give you regular incomes, and also a lump sum amount to address emergencies.



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