National Pension Scheme (NPS): Benefits, Eligibility, and Key Features

The NPS is one of the most important changes made by the Government of India for bringing a proper structure to the retirement policies for its people.

Designed to provide for a comfortable life after retirement, NPS is a defined contribution pension system that lets an individual contribute a portion of his income regularly to a selected fund.

Many people have preferred it because it is cheap, and it can be accessed easily since it is not anchored on a fixed schedule of payments since it is considered tax advantageously.

In this article let us explore the National Pension Scheme beginning with the features, eligibility for the scheme, investments one can make under the scheme and the advantages that come with it.

Table of Contents

Toggle

What is mean by National Pension Scheme (NPS)?

The National Pension Scheme is a pension tiered ‘defined contribution’ program which was launched in the year 2004 by Pension Fund Regulatory and Development Authority (PFRDA). NPS stands for New Pension System which is an attempt to make people to save their pension throughout the life and invest it in orderly manner.

NPS enables the person to build pension corpus over time where the person can contribute periodically and the Corpus so formed is invested in equities, corporate bonds, government securities and funds including AIFs. At the end of service, it pays pensions in form of monthly allowance or a lump sum derived from the corpus.

Eligibility for NPS

The NPS is open to all the citizen of India and for the unorganized sector as well. First of all, NPS was introduced exclusively for government employees, but then, everybody joined this program and it became universal. Below are the eligibility criteria:

Age Limit: The scheme is open for any person who is 18 years old or more but below 70 years of age.
Residency: The scheme is open for the investment to all the residents including those from the other countries – Non Residential Indians (NRIs).
Citizenship: As per rules, residents of India including NRIs are permitted to invest in NPS account.

How Does NPS Work?

National Pension Scheme exists on the defined contribution model where a member pays some percentage of his/her salary or wages for accumulation of pension amount. There are two types of accounts in NPS:

Tier I Account:

This is the first NPS account and contribution made to it is also called the accumulated corpus and is a sort of retirement fund.
This account is limited to withdrawals and the idea is to enrich it for a long period of time.

Tier II Account:

This is an optional account that permits more flexibility in relation to withdrawals.
For Tier II, you get to contribute after tax, and you can withdraw the cash at any one time with no questions asked.

Investment Options in NPS

Indeed, the freedom of choice as to investments is one of the major characteristics of the National Pension Scheme. The contributions that are effected are accumulated in the central corpus, and the individual investor can then decide on the asset class to invest in.

The following are the investment options available under NPS:

Equity (E): Investing in equities (stocks) on average yield greater returns than bonds but in so doing attracts greater risk.
Corporate Bonds (C): Acquisition of corporate bonds and stocks or other money market securities are a way of investment which gives moderate amount of return with slightly lower risks than the equity investment.
Government Bonds (G): These are safe investments which are relatively less attractive with assured and predictable long-run return.
Alternative Investment Funds (AIF): An option that can enable the investor invest in other classes such as RE, gold, etc.

NPS allows investors to select Active Choice in which you decide about the amount to be invested in different classes of assets or Auto Choice where the amount for investment in different classes of assets is predetermined based on age.

Benefits of NPS

The National Pension Scheme thus provides for so many benefits to make it to its users in the retirement saving plan. Let’s look at some of these benefits:

Tax Benefits:

Amount deposited to the NPS account can be claimed for deduction in income tax under section 80 C up to Rs 1,50,000 only.
Extra exemptions under Section 80CCD(1B) additionally offer individuals the opening to comprehend the reasoning up to Rs 50,000 adjacent to the reasoning of Rs 1.5 lakhs under Section 80C.
The money also grows under the NPS is tax free, hence, one only pays taxes when the money is withdrawn.

Low Cost:

NPS is one of the most economical pension schemes in terms of fund management charges to create wealth in the long run.

Long-term Growth:

NPS offers tailor-made plans out of equity and fixed income instruments and has the possibility of wealth creation in your retirement kitty .
The returns from NPS are market related, as the investment offer better growth apart from the traditional pension related schemes.

Transparency:

NPS is operated by fund managers and contains full disclosure regarding the handling of funds, additionally, updated reports can be accessed online.

Flexibility in Withdrawals:

One-sixth of the corpus can be commuted for lump sum on retirement while the remaining amount shall be utilized as per the rules. The rest 40% is invested in purchase of an immediate Annuity to provide for monthly pensions and other retirement benefits.

How to Open an NPS Account

Opening an NPS account is simple, and you can do it through the following steps:

Online Registration:

In India you can open the account through the online mode by either visiting the official website of PFRDA and NPS Trust.
To start and complete the process provide the KYC documents as the proofs of identity, address, and PAN card.

Through Banks:

Most banks are currently involved in the registration of NPS. An NPS account can be opened by completing the form that can be found in the particular bank branch and submitting necessary documents.

Through NSDL/POP-SP:

NPS can also be opened through any of the Nodal Service Providers (NSDL) or share Point of Presence Service Providers(POP-SP).

Conclusion

The NPS is a very efficient step for people who are planning for a stable financial plan after retirement. It remains exceptional due to the tax advantages, operational openness, minimum charge structures and numerous choices easily accessible for investment through NPS.

For every individual whether they are an employee or a freelancer, the NPS is an ideal plan that anyone who wants a successful retirement can subscribe to. This shows that time is of essence and to ensure you have sufficient amount saved to cater for your needs in future then ought to start saving now to in order to have large amount of money after the compound interest has worked out.

Read More Blogs:)

Sarkari Rojgar: A Manual on Government Sector Employment in India

sarkareeportal