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Planning for the Future: A Deep Dive into India's National Pension System.

  • Dec 12, 2023
  • 5:52 pm


Have you ever considered how you plan to spend your retired life?

Have you started contributing to your National Pension System (NPS) account, a voluntary retirement contribution to the pension scheme in India that allows saving for your retirement?

Here's a comprehensive guide to help you understand the workings of the National Pension System and how to invest in it (NPS).

What is the National Pension Scheme? 
The Government of India launched the National Pension System, or NPS, in January 2004 as a voluntary contribution-based retirement benefits program.

All Indian citizens, even those in the unorganized sector, are eligible for the National Pension System (NPS), established to give retired people a stable and predictable pension income.

Each individual who registers for the program must form an NPS account and make regular contributions for the duration of their work.

The Pension Fund Regulatory and Development Authority, or PFRDA, oversees the national pension system and permits qualified fund managers to invest this capital in various financial services.

How does the National Pension System work?
Individual deposits are combined under the NPS to create a pension fund. PFRDA-regulated professional fund managers then invest in diversified portfolios of shares, government bonds, treasury bills, and stocks by authorized investment rules. 
Subject to limits and conditions, the account holder may designate the fund manager to oversee their investments and decide how much they wish to contribute to the pension plan.

When the account holder retires, they can take out a portion of the corpus in one lump sum and use the rest to buy an annuity plan, providing them with a reliable source of revenue for the remaining period of their lives. Any of the insurance providers subject to IRDA regulation will sell an annuity.

However, if an NPS account holder dies before turning 60, the accumulated total is transferred to their nominee or legal heir.

Who should invest in the National Pension System?
Any Indian citizen between 18 and 60 on the date their application is submitted is eligible to apply for the NPS. The account holder must adhere to Know Your Customer (KYC) guidelines and not be mentally incapacitated or an undischarged insolvent.  

How Many National Pension System (NPS) types are there? 
Tier I and II are the two main account categories under the National Pension Plan. The latter is an optional addition, while the former is the default account.  
The two types of funds will be explained in the section that follows.

Tier-I Account:
Your retirement funds will be deposited into this non-withdrawable account. Under Section 80C of the Income Tax Act, 1961, an investment made by this section may be deducted up to Rs. 1.5 lakh. In addition, you can invest and deduct up to Rs. 50,000 under the Income Tax Act of 1961 Section 80CCD (1B).  

Tier-II Account:
This kind of account is voluntary retirement/savings. Only those holding a Tier-I account under the National Pension System can open a Tier-II account. You can take money out of this account whenever you want.
Your money will be invested using the "Auto Variety" option if you choose not to select an asset allocation.

'Points of Presence' (POPs) are branches of approved service providers where you can open an account under the National Pension System.  

You are free to switch between a POP's units whenever it is convenient for you to do so. The Income Tax Act of 1961 provides for periodic modifications to the tax benefits under the National Pension System in India.

What are the benefits of NPS (National Pension System)?
The PFRDA oversees the National Pension System (NPS) through open and honest investment guidelines, frequent performance evaluations, and NPS Trust's oversight of fund managers.

The National Pension System membership is adaptable. Throughout a fiscal year, NPS members have the flexibility to alter their subscription amount and contribute to the NPS fund at any point.   
They are free to select the investments that they want. Users can access and manage their accounts online from any location, even if they move or change jobs.  

Returns/ Interest:
A portion of the NPS is allocated to stocks, which might not provide guaranteed returns. On the other hand, compared to other conventional tax-saving investments, such as the PPF, it offers substantially higher returns.
With over ten years of operation, this program has produced 9% to 12% annualized returns. If dissatisfied with the fund's performance, you can switch fund managers in the National Pension System.

Risk Assessment:
Currently, the National Pension Scheme's equity exposure is capped at between 75% and 50%. This cap is 50% for government employees. Within the specified range, the equity component will decrease by 2.5% annually starting when the investor turns 50.
However, the cap is 50% for investors 60 and older. Investors benefit from this stabilization of the risk-return equation, which makes the corpus relatively immune to the equity market's volatility.

When compared to alternative fixed-income schemes, NPS offers a higher earning potential.

Tax Benefits of National Pension System

Investors have plenty of NPS tax benefits to choose from. A few essential tax-saving advantages for investors are listed below:

You can claim up to Rs 1.5 lakh under Section 80C of Income Tax if you invest in NPS.
Section 80CCD of the Income Tax Act allows additional tax benefits on investments up to Rs 50,000 under subsection (1b). This exceeds the Rs 1.5 lakh u/s 80C ceiling.

Subscribers to the corporate and government NPS options receive additional tax benefits on their employer's contributions, in addition to the 80CCD(1b) and 80C tax benefits.

According to current NPS regulations, the maximum is 10% for corporate NPS subscribers and up to 12% of the basic salary for central and state government NPS account holders.

National Pension Scheme Withdrawal Rules After Retirement:
Currently, 40% of the corpus is placed into an annuity plan, and the remaining 60% can be withdrawn in one lump sum. Under the new NPS guidelines, subscribers with a corpus of less than or equal to Rs 5 lakh can start the entire amount without purchasing an annuity plan. There is no tax on these withdrawals either.

For instance, upon retirement, an individual with a corpus of Rs 4.5 lakh may withdraw the total amount. The tax-free withdrawal cap is set at Rs 6 lakh if the canon surpasses Rs 10 lakh. They must purchase an annuity plan to cover the remaining Rs 4 lakh.

Annuities have income-based taxation depending on the income bracket, but withdrawals are tax-free. Your assistance will, therefore, be taxed at the individual's tax bracket rate if it is worth Rs 4 lakh. Depending on the years of payment, the payment is taxable.

Hence, we hope that the guide was a valuable read and has helped you to know what NPS (National Pension System) is. 
We hope you think of investing in it and understanding its significance.  

Reference Source: 

cleartax, pfrda, irdai, maxlifeinsurance, etmoney, npscra, nptrust 


"Content shared is for information and education purposes only and should not be treated as investment or trading advice. Please do your own analysis or take independent professional financial advice before making any investments based on your own personal circumstances."

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