NPS - National Pension System, Benefits & How to Apply

NPS - National Pension System, Benefits & How to Apply

Anubhav Dwivedi's Picture
Anubhav Dwivedi
•

What is NPS and How it works?

  • The National Pension System (NPS) is a voluntary, long-term retirement savings scheme in India. It is designed to provide systematic savings and a pension income to individuals during their retirement years. Here's how the NPS works:

Enrollment:

  • Individuals who want to participate in the NPS can enroll by opening an NPS account. This can be done through authorized entities known as Points of Presence (POPs) or online through the NPS Trust website.

Tiers of NPS:

  • NPS has two tiers - Tier-I and Tier-II.

Tier-I:

  • This is the primary NPS account that is mandatory for all subscribers. It is a long-term retirement account with restrictions on withdrawals. Subscribers are required to contribute regularly, and there are limits on the withdrawal of funds before retirement.

Tier-II:

  • This is a voluntary savings account with more flexibility in withdrawals. Unlike Tier-I, Tier-II allows subscribers to withdraw funds as per their needs. However, having a Tier-I account is a prerequisite for opening a Tier-II account.

Permanent Retirement Account Number (PRAN):

  • Each subscriber is assigned a unique Permanent Retirement Account Number (PRAN), which is portable and remains the same throughout the subscriber's life, regardless of changes in employment or location.

Contributions:

  • Subscribers contribute to their NPS accounts regularly. Contributions can be made either through systematic contributions (Auto Debit) or through other modes specified by the Pension Fund Regulatory and Development Authority (PFRDA). Subscribers can choose the frequency and amount of contributions.

Investment Options:

  • NPS offers different investment options, known as Pension Fund Managers (PFMs). Subscribers can choose their preferred PFM based on their risk appetite. PFMs invest the contributions in various asset classes, including equities, corporate bonds, and government securities.

Tax Benefits:

  • Contributions made to the NPS are eligible for tax benefits under Section 80CCD of the Income Tax Act. Additionally, there is a separate deduction for the employer's contribution to the NPS under Section 80CCD(2).

Accumulation Phase:

  • During the accumulation phase, the contributions grow along with the returns generated by the chosen investment options. The corpus continues to accumulate until the subscriber reaches the retirement age.

Withdrawal Options:

  • At the time of retirement or upon reaching the age of 60, subscribers can withdraw a portion of the accumulated corpus as a lump sum. The remaining amount must be utilized to purchase an annuity, providing a regular pension income.

Exit and Pension Options:

  • Subscribers have the option to choose between different annuity plans offered by various insurance companies. An annuity plan provides a regular pension income to the subscriber after retirement.

Monitoring and Regulation:

  • The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which oversees the functioning of the scheme, sets investment guidelines, and monitors the performance of Pension Fund Managers (PFMs).

It's essential for individuals to understand the terms and conditions, investment options, and withdrawal rules before enrolling in the NPS. Consider consulting with financial advisors to make informed decisions based on your financial goals and circumstances.

Also Read Our More Article:-

How can I open NPS account online?

  • The National Pension System (NPS) in India can be opened online through both the NPS Trust website and the websites of Point of Presence (POP) service providers.

Here are useful steps to open an NPS account online:

Choose a POP:

  • Select a Point of Presence (POP) from the list of authorized entities. POPs are institutions that act as intermediaries between the NPS subscribers and the NPS system.

Visit the POP's Website:

  • Go to the official website of the chosen POP. Different POPs may have slightly different procedures, so follow the instructions provided by the specific POP you've chosen.

Registration:

  • You may need to register on the website by providing necessary details such as your PAN (Permanent Account Number), Aadhaar number, and other personal information.

Fill in the Application Form:

  • Complete the online application form with accurate details. You will typically be required to provide personal information, nominee details, investment options, and other relevant information.

Upload Documents:

  • Scan and upload the necessary documents, including a photograph and signature, as per the guidelines provided by the POP.

Payment:

  • Make the initial contribution payment online through the available payment options. You may need to link your bank account for this purpose.

Acknowledgment:

  • After successful submission, you should receive an acknowledgment receipt or reference number. Save this for future reference.

PRAN Generation:

  • Once your application is processed, a Permanent Retirement Account Number (PRAN) will be generated. You will receive a PRAN Kit containing the PRAN card, subscriber details, and other relevant information.

NPS Eligibility Criteria
Who is eligible for NPS scheme?

  • The minimum age limit to avail of the benefit is 18 years, and the maximum age for entry is 70 years.
  • Must be a resident or non resident Indian citizen.
  • The applicant must be KYC compliant.
  • Individuals should not have a pre-existing NPS account.

NPS Documents Required

You need the following documents to open an NPS account:

  • Aadhaar card
  • Voter ID card
  • Recent photo
  • Active bank account details
  • PAN or NREGA card

NPS Customer Care Numbers

  • Telephone: 022 2499 3499
    Toll Free for Registered Subscribers with PRAN: 1800 222 080

What are the Advantages of NPS?

Here are the key advantages of the National Pension Scheme (NPS):

  • Tax Benefits: Contributions to NPS qualify for tax deductions up to ₹1.5 lakh under Section 80C, and an additional deduction of ₹50,000 under Section 80CCD(1B), making it a tax-efficient retirement plan.
  • Low-Cost Investment: NPS has one of the lowest fund management charges compared to other investment options, ensuring more of your money is invested for growth.
  • Flexible Investment Options: Investors can choose from a variety of asset classes like equities, government bonds, and corporate debt, allowing for customization based on risk tolerance and retirement goals.
  • Portability: NPS accounts are portable, meaning they can be accessed and maintained across different jobs and locations without the need for multiple accounts.
  • Retirement Security: It helps build a substantial retirement corpus by encouraging long-term disciplined savings, ensuring financial security post-retirement.
  • Employer Contributions: Employers can also contribute to the employee’s NPS account, enhancing retirement savings.
  • Equity Exposure: It allows equity investment of up to 75%, offering the potential for higher returns over the long term, while still maintaining a balanced portfolio.
  • These features make NPS an attractive and secure option for individuals planning their retirement.

What are the disadvantages of NPS?

Here’s a detailed explanation of the disadvantages or cons of the National Pension Scheme (NPS):

  • Withdrawal Limits: While NPS allows partial withdrawals, there are restrictions on the amount and conditions under which you can withdraw. The bulk of the retirement corpus (at least 40%) must be used to purchase an annuity, limiting the flexibility in accessing your entire savings upon retirement.
  • Taxation at the Time of Withdrawal: Although NPS offers tax benefits during the investment phase, the withdrawals at retirement are partially taxable. While 60% of the corpus is tax-free, the annuity income derived from the remaining 40% is subject to tax as per the individual’s applicable tax bracket, which could reduce overall returns.
  • Account Opening Restrictions: NPS accounts can only be opened by individuals aged between 18 to 70 years, which limits accessibility for those who might start planning for retirement later in life.
  • Limited Exposure to Equities: NPS limits equity exposure to 75% (up to age 50) for aggressive investors, which may restrict the potential for higher returns that other equity-focused retirement plans might offer, particularly for those looking for more growth-oriented investments.
  • Mandatory Annuity: A key drawback of NPS is the mandatory purchase of an annuity with at least 40% of the accumulated corpus upon retirement. Annuity rates can often be lower than expected, reducing the potential post-retirement income.
  • Complexity in Choosing the Best Fund Manager: NPS offers various fund managers to choose from, which can be overwhelming for some investors. Selecting the right fund manager, keeping track of their performance, and understanding different investment styles adds a layer of complexity, especially for those who are not well-versed in financial management.

These limitations should be carefully considered while evaluating NPS as a retirement savings option.

Conclusion:

  • The National Pension Scheme (NPS) stands out as a robust, flexible, and tax-efficient retirement savings plan designed to provide financial security in the golden years. With its low cost, diverse investment options, and government backing, it appeals to individuals seeking a long-term, disciplined approach to retirement planning. Whether you're a salaried employee or self-employed, NPS offers customizable options that cater to different risk appetites and goals. By encouraging regular contributions and offering attractive tax benefits, NPS helps build a sizeable retirement corpus over time. Investing in NPS is a step towards a financially secure and independent future, ensuring that your post-retirement life remains comfortable and stress-free.

FAQs:

What is the NPS scheme and benefits?

  • The National Pension Scheme (NPS) is a convenient, affordable, tax-efficient, and adaptable retirement savings plan that offers portability. In this scheme, individuals contribute towards their retirement fund, and employers can also make co-contributions, promoting the financial security and welfare of the employee in the long term.

Is NPS tax free?

  • So, if you use 60% of NPS corpus for lump sum withdrawal and remaining 40% for annuity purchase, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax as per the applicable tax slab.

What is the lock in period for NPS?

  • NPS allows tax-free partial withdrawals after a 3-year lock-in, up to 25% of the individual's contributions. Subscribers can make a maximum of three withdrawals during the entire tenure.

What is the maturity period of NPS?

  • 60 years ofNPS matures when the subscriber turns 60 years of age. Meaning, Vineeth will able to contribute for the next 36 years towards the scheme and expects a return on investment (ROI) of 9% per annum.

What happens to NPS after death?

  • In case none of the dependent family members (spouse, mother & father) are alive, 20% of the corpus of the subscriber is paid as lump sum to the nominees/legal heirs as the case may be. The balance corpus i.e. 80% is payable to the surviving children of the subscriber or to the legal heirs, as the case may be.

Can I withdraw 100% from NPS?

  • If the total accumulated pension corpus is less than or equal to Rs. 5 lakh, Subscriber can optfor 100% lumpsum withdrawal.
We hope that you like this content and for more such content Please follow us on our social site and YouTube and subscribe to our website.

Manage your business cash flows and payable/receivables using our Bahi Khata App
Download Bahi Khata
View All