NPS - A Must-Have Investment for a Financially Happy Retired Life

The National Pension System is the world’s lowest-cost pension plan. Discover how this retirement savings scheme can lead you towards a secure future.

At some point in time, most of us will look to retire from an active working life and move to a retired life. The experience will be a mixed bag. The joy of leisure time meets the jitters of financial security. If only there was a roadmap to a smooth transition into the sunset years. Well, dear readers, you are in luck!

India's National Pension System (NPS) is the sherpa you need for this journey. Primarily a voluntary retirement savings scheme, NPS allows you to contribute systematically during your working life to build a solid retirement fund.

But wait, there's more! NPS is more than just a savings scheme. It's a flexible, easy-to-manage system that can deliver a sizeable corpus for your twilight years.

Like any investment avenue, it comes with its own features that need a little untangling.

Read on, and let's know how!

What's the NPS?

The National Pension System is a government-backed retirement savings scheme. It's designed to help you, the subscriber, accumulate a significant pension fund through regular contributions during your employment years.

These contributions are pooled into a pension fund managed by professionals regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Here's the interesting part - they are invested in diversified portfolios, including government bonds, bills, corporate debentures, and shares.

At the time of retirement, or what we call 'normal exit' from NPS, you can use the accumulated pension wealth to purchase a life annuity from a PFRDA-empanelled life insurance company.

You also have the option of withdrawing a part of it as a lump sum.

Types of NPS Accounts

The National Pension System (NPS) offers two types of accounts, designed to cater to different investment needs and goals:

1. Tier-I Account

• Primary, mandatory retirement account for long-term savings.
• Contributions are regularly credited and invested as per the subscriber's chosen fund manager.
• Minimum annual contribution of ₹1,000 to keep the account active.
• Withdrawals are restricted and permitted only under specific exit and withdrawal rules, generally upon retirement (age 60).
• At retirement, up to 60% can be withdrawn lump sum; the remainder must be used to purchase an annuity.
• Eligible for significant tax benefits under Section 80C and Section 80CCD(1B).
• Annual maintenance charges (AMC) apply.

2. Tier-II Account

• An optional savings account is available only if the subscriber holds an active Tier-I account.
• Functions as a flexible investment and withdrawal account with no lock-in period.
• No minimum contribution requirement each year after initial investment.
• Withdrawals are allowed anytime with no exit restrictions.
• No separate AMC charges.
• Funds can be transferred from Tier II to Tier I if desired.
• Does not offer tax benefits to most subscribers, except for certain government employees, after a 3-year lock-in period.

This bifurcation allows subscribers to plan for retirement via Tier-I while maintaining liquidity and flexibility for other financial needs through Tier-II

Both accounts can be operated online and are linked to your Permanent Retirement Account Number (PRAN).

Features of National Pension Scheme  

The National Pension Scheme (NPS) brings together a suite of thoughtfully designed features aimed at helping individuals secure their financial future. From dynamic investment choices and strong risk controls to valuable tax incentives and flexible withdrawal options, the scheme offers a comprehensive approach to retirement planning. 

The following sections highlight the key features that make NPS a compelling, well-rounded solution for building long-term financial stability and peace of mind.

The Return Game

One of the major attractions of NPS is its promising returns. Sure, it might not offer guaranteed returns as a chunk of the NPS goes to equities, but hey, no risk, no reward, right? Historically, NPS has delivered 9% to 12% annualised returns, outperforming other tax-saving investments.

If you find your fund manager's performance not up to the mark, guess what? You can switch them!

Asset Allocation Mitigates Risk

The NPS is gaining popularity among Indians planning for retirement due to its tax benefits and investment flexibility.

The NPS has got your back when it comes to risk mitigation. The scheme puts a cap on equity exposure ranging from 50% to 75%, ensuring that your corpus is somewhat safe from the wild swings of the equity market.

The NPS offers diverse asset class options - Equities, Corporate Bonds, Government Bonds, and Alternative Investment Funds, and allows you to decide the proportion of your investments in each.

The asset allocation between equity, government, and corporate bonds is automatically adjusted based on the investor's age.

Tax Advantage

Your contributions towards NPS can fetch you tax deductions under different sections of the Income Tax Act:

• Employee contributions: Eligible for tax deductions up to 10% of pay (Basic + DA) under Section 80 CCD(1) and additional deductions up to ₹50,000 under Section 80 CCD(1B).
• Employer contributions: The amount contributed by the employer is eligible for a tax deduction of up to 10% of salary (Basic + DA) under Section 80 CCD(2).
• Self-employed contributions: You can claim tax deductions up to 20% of your gross income under Section 80 CCD(1) with a ceiling of ₹1,50,000. 

Flexibility and Portability

Whether you change your job or city, your NPS account sticks with you. Its portability feature ensures that you can maintain the same account throughout your career, no matter where you are or who you work for.

NPS also allows for partial withdrawal for specific purposes like children's education, buying a house, or medical emergencies, subject to certain conditions. This keeps your money within reach, even before retirement.

Pension Planning

Think of the NPS as your personal pension planner. It ensures a regular income flow even after retirement.

When you reach 60, or when you decide to exit the scheme, you can withdraw up to 60% of your accumulated wealth as a lump sum.

The remaining amount must be used to buy an annuity that will provide you with a regular monthly pension.

Retired and Financially Secure

Planning for retirement is like navigating a maze. With the right guide, you can turn this complicated maze into a walk in the park. The National Pension System (NPS) is that guide - reliable, beneficial, and surprisingly adaptable to your needs.

How NPS Helps You Achieve a Financially Happy Retirement?

The National Pension Scheme (NPS) supports your retirement journey by helping you build a secure financial cushion over time. With regular, disciplined contributions, your money is invested in a diversified mix of asset classes, including equities and bonds. This helps your corpus grow while balancing risk and return.

One of the key NPS benefits is the tax-saving opportunity it offers, along with flexibility in choosing fund managers and asset allocation. At retirement, you can withdraw a part of the savings as a lump sum and use the rest to get a regular monthly pension.

Whether you're self-employed or salaried, starting early with NPS investment gives you a head start on building a reliable source of income for your golden years. For those seeking low-cost, long-term retirement planning in India, NPS is a strong and dependable choice.

NPS vs Other Retirement Options

Choosing the right retirement plan is essential for securing your financial future in India. 

• The National Pension Scheme (NPS) stands out for its combination of market-linked growth, professional fund management, tax advantages, and low costs. Unlike traditional options, NPS offers diversified asset allocation, equities, government bonds, corporate bonds, and alternative investments, which helps balance returns and risk. 

• Bonds, especially government and corporate bonds, are a key part of conservative retirement portfolios, offering steady income with lower risk but generally lower returns compared to NPS’s equity exposure. 

• Other popular options, such as the Public Provident Fund (PPF) and the Employee Provident Fund (EPF), focus on wealth accumulation with guaranteed returns but offer less flexibility. 

• Mutual Funds offer flexibility and potentially higher growth, but with varying risk profiles and no specific retirement structure or tax benefits, unlike NPS.

 

How to Open an NPS Account?

Opening a National Pension System (NPS) account is simple and can be done either online or offline, making it accessible and convenient for all eligible Indian citizens.

Online Process:  

1. Visit the official eNPS portal of your chosen Central Recordkeeping Agency (CRA), such as NSDL, KFintech, or CAMS.  
2. Complete the registration by providing Aadhaar, PAN, bank details, and nominee information.  
3. Upload scanned documents, including photo and signature, and choose your Pension Fund Manager and investment option (auto or active choice).  
4. Make the initial contribution online (minimum ₹500 for Tier-I).  
5. You will receive your Permanent Retirement Account Number (PRAN) immediately, allowing you to manage your account digitally.

Offline Process:  

1. Approach a Point of Presence-Service Provider (PoP-SP), like a designated bank branch or financial institution.  
2. Collect and complete the NPS registration form, including the required KYC documents (identity proof, address proof, and photograph).  
3. Submit the form and make the first contribution via cheque or demand draft.  
4. Receive your PRAN card and welcome kit, and start your NPS journey offline.

These options ensure that whether you prefer a fully digital approach or personal assistance, opening an NPS account is quick and hassle-free. For finding the nearest PoP-SP and more details, you can visit the CRA website.  

Conclusion 

 The National Pension Scheme (NPS) is more than just a savings tool; it’s your retirement companion. With its blend of flexibility, tax benefits, long-term growth potential, and post-retirement income, it offers everything a sound retirement plan should.

In the journey of retirement planning in India, NPS helps you stay disciplined while giving you control over your investments. The sooner you begin, the better your chances of building a substantial corpus and achieving a financially happy retirement.

Start your NPS journey today and invest in a retirement that’s stable, secure, and stress-free.

Frequently Asked Questions 

Q: What is the NPS scheme and its benefits?

A: The National Pension System (NPS) is a contribution pension scheme that allows individuals to plan for their retirement while still employed. It provides several benefits, including being regulated by the PFRDA, being one of the lowest-cost pension schemes globally, portability across employment and location, tax incentives under the Income Tax Act 1961, market-linked returns, and online access to NPS accounts.

Q: How much monthly pension will I get from NPS?

A: The monthly pension you get from NPS will depend on various factors, such as the asset classes you've invested in, the duration of your investment, and the amount of your contribution. You can calculate your expected monthly pension and potential tax benefits using various calculators that are available online.

Q: What is the NPS interest rate?

A: The NPS interest rate is not fixed and depends on the performance of your invested assets. Therefore, the amount of return received upon retirement cannot be determined earlier.

Q: What's the difference between NPS Tier I and Tier II?

A: An NPS Tier I account is mandatory and serves as the individual pension account. A Tier II account is a voluntary savings facility and serves as an add-on to a Tier I account. Tier I accounts offer tax benefits but come with restrictions on withdrawals. Tier II accounts do not offer tax benefits but have no withdrawal restrictions.

Q: Can I withdraw money from NPS?

A: Yes, you can partially withdraw up to 25% of your contributions after three years for specific reasons such as illness, education or marriage of children, disability, property purchase, or starting a new venture. After five years, you can prematurely withdraw a maximum of 20% of the corpus as a lump sum, with a minimum of 80% of the corpus utilised for purchasing an annuity plan for receiving the pension. If the accumulated corpus is less than ₹2,50,000, the entire corpus is paid as a lump sum to the subscriber.

Q: Who is eligible for the NPS scheme?

A: Any Indian citizen aged between 18-70 years, including Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs), is eligible to subscribe to NPS, as long as they are legally competent to enter into a contract as per the Indian Contract Act. Persons of Indian Origin (PIOs) and Hindu Undivided Families (HUFs) cannot subscribe to NPS.

Q: What is the maturity period of NPS?

A: The maturity period of NPS is when the subscriber reaches the age of 60. You are expected to contribute to your NPS account until you reach this age. However, under certain conditions, you can make partial or premature withdrawals before reaching the age of 60.