The National Pension Scheme (NPS) is a pension scheme. This pension scheme was launched by the government of India in 2004 for government employees only. Later on, it was open to every individual in India voluntarily. It means from May 2009 any Indian citizen can open this pension account.
Who can open an NPS account?
Any individual can have only one NPS account. When you open an NPS account you will be provided a Permanent Retirement Account Number (PRAN). This is a unique 12-digit number which identifies that you are an NPS account holder.
Types of National Pension Scheme (NPS) account
Tier 1
Tier 1 is a default (mandatory) pension account while opening an NPS account.
All the investments made under tier 1 have maturity till the age of 60. This means you can only withdraw a partial amount of this till the age of 60. Hence it is best to create wealth in your retirement planning.
This option gives tax benefits under the Income Tax of India Act u/s 80CCD (1B). An additional deduction of up to ₹ 50,000 can be claimed for the annual investment in NPS. this is over and above ₹ 1,50,000 fall’s u/s 80c. It means if you have achieved 1.5 lac tax benefit u/s 80 c you can further invest ₹ 50,000 in NPS for tax exemption.
Tier 2
This is an optional account type for only NPS subscribers. It is mandatory to have an NPS tier 1 account to open this account. You can invest any amount in a tier 2 account. The minimum contribution to open this account is ₹ 1000.The minimum contribution for annual ₹ 250.
There is no withdrawal restriction and also no lock-in period in this scheme. You can withdraw any amount at any point in time or at any interval. You can open a tier 2 account for better returns.
What are the two investment options?
Active choice
An investor can actively choose the right asset allocation for them. This is why this choice is called active choice. Investors can choose up to
75% Equity exposure (Maximum)
100% Government Bonds(Maximum)
100% Corporate Bonds(Maximum)
5% Alternate Investment option(Maximum).
Passive choice
This option is best for an investor who believes in automatic asset allocation. A subscriber can change the choice 4 times in a financial year.
Conservative Life Cycle Fund (LC25)
Moderate Life Cycle Fund (LC50) – Default
Aggressive Life Cycle Fund (LC75)
Benefits of National Pension Scheme (NPS)
Flexibility to invest
You can start it with just ₹ 500. The minimum investment amount is ₹ 1000 per annum. you can take tax benefits on only ₹ 50,000 investments though there is no upper limit for investment.
Create retirement fund
You can create a retirement corpus in a disciplined way. Lock-in makes it safer by undue redemptions. To create wealth we have to stay with our investment. This plan restricts you from making the withdrawal thus you can create wealth very easily.
Save tax and EEE benefit
You can benefit from a tax exemption of ₹ 50,000 every year. This gives you power of 3E (Exempt Exempt Exempt). You will be tax exempted from your annual investment, annual returns and on your withdrawal amount. You can only withdraw 60% of your retirement corpus. Rest 40% of the amount you have to buy an annuity plan from pension providers.
Flexibility to choose pension fund managers
You can choose fund managers of your own choice. Currently, 10 pension fund managers in India manage contributor’s investments.
The choice between different fund option categories
Based on different risk profiles there are 4 types of asset class.
Class E: Equity
Invests in equity up to a maximum of 75%. The investment in this category is in passive mutual funds like index funds and ETFs, which are directly linked to market performance. In the long run, this category is expected to provide higher returns.
Class G: Government bonds
Buy corporate bonds up to a maximum of 100%. This category invests in corporate bonds at a specific interest rate. It is less risky than equity, but the returns are lower.
Class C: Corporate debt
In Government Securities up to a maximum of 100%. This category buys government bonds at a specific interest rate. Therefore, it is less risky than equity but has lower returns.
Class A: Alternative investment funds
This category invests in alternative options up to a maximum of 5% such as property and infrastructure.
An Investor can decide on allocation in each asset category. They can change the allocation 4 times in a year.
Invest in lumpsum or as SIP
There are two ways to invest in an NPS account.
A- You can put a lump sum amount in an NPS account.
B- You can also start a SIP in the National Pension System.
Disciplined investment to create a pension corpus
Regular investment and Lock-in make this disciplined investment to create a pension corpus.
Partial withdrawal / Premature / Normal
A- Partial withdrawal
A subscriber can withdraw up to 25% of his / her contribution for any specific reason like child education, medical emergency, child marriage etc. after completing 3 years. He/she can withdraw 3 times in total NPS term.
B- Premature withdrawal
A subscriber can withdraw ₹ 2.5 lac after completing 5 years of investing time.
C- Normal
After attending age 60 a subscriber can withdraw 60% of his corpus. The remaining 40% of the corpus will be utilised to buy an annuity plan for annuity providers.
So, What are you waiting for. National Pension Scheme is good for both Retirement Planning and Tax Savings.
Click above button to open your NPS Account online.