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.
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.
Also, the NPS provides two asset allocation choices: Auto Choice,
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 Rs. 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 Rs. 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.
The question isn't whether you should join NPS but how soon.
The sooner you start, the better your retirement can be.
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 Rs.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.