National Pension Scheme (or NPS) is one of the government-sponsored pension schemes. NPS has launched in the year 2004 by the Pension Fund Regulatory and Development Authority of India (PFRDA). The NPS scheme was particularly designed to secure the financial future of people after retirement.
What is the National Pension Scheme?
In this scheme, the subscribers can make a regular contribution to the account during their working life and can get the advantage of the regular annuity after retirement. Additionally, the NPS account holders can make a partial withdrawal from the NPS account in case of any eventualities.
NPS involves two account types –
- Tier-I: It is mandatory for all NPS subscribers
- Tier-II: It is a voluntary account
Eligibility Criteria of NPS Scheme
Below are the eligibility criteria of NPS scheme:
- NPS account can open by any Indian citizen.
- The minimum age eligibility for opening the NPS account is 18 years and the maximum age limit for opening the NPS account is 65 years.
- The applicant should be KYC compliant.
- The applicant should bat have any pre-existing NPS account.
Benefits of National Pension Scheme
The main benefits of national pension scheme (NPS) are:
1. Low Cost
NPS is referred to be the world’s lowest-cost pension scheme. Administrative charges and fund management fees are also low.
2. It is Simple
All candidate has to do is to open an account with any one of the POPs being run through all Head Posts Offices across India and get a Permanent Retirement Account Number(PRAN)
3. It is Flexible
Candidate can choose his/her own investment option and Pension Fund or select the Auto choice to get better returns.
4. It is Portable
Candidates can operate their accounts from anywhere in the country. They can pay contributions through any of the POP-SPs irrespective of the POP-SP branch with whom the candidate is registered, even if he/she changes his/her city, job, etc, and also contribute eNPS. The account can be shifted to any other sector like Government Sector, Corporate Model in case the subscriber gets employment.
5. It is Voluntary
The subscriber can contribute anytime during a financial year and can also adjust the amount he/she wants to invest every year.
6. Offers Flexibility
National Pension Scheme gives flexibility to the subscribers that they can select their choice of investment and pension fund and examine their investment growth.
7. It is Regulated
The NPS scheme is monitored by the Pension Fund Regulatory and Development Authority of India (PFRDA). With proper regulation and transparent investment norms, NPS offers transparency and reliability to the subscribers.
Advantages or Pros of the NPS
The National Pension Scheme (or NPS) has its own set of advantages or pros. All the savings of the investor are joined in the pension fund of the investor, in the NPS scheme. Some of the advantages of the NPS Scheme are mention below:
- Low investments
- Easy investments
- Easy documentation
- Higher returns
- Wide coverage and bigger canvas
- Funds invested by the able fund managers
- No restriction towards the frequency of contributions
- Regulations that safeguard the investments
- Easy access
- A very cheap plan
- Easy maintenance of the account
Disadvantages or Cons of the NPS
The National Pension Scheme (or NPS) has its own set of disadvantages or cons. when we compare it to the other investment/pension option available. Some of the disadvantages of the NPS Scheme are mention below:
- Withdrawal limits
- Lesser Benefits than the earlier pension schemes
- Taxation at the time of withdrawalÂ
- Account opening restrictions
- Investment restrictions
- No guaranteed returns
National Pension Scheme Tax Benefits
The NPS enables tax exemption on the contribution made towards the scheme up to the maximum limit of Rs. 1.5 lakh in section 80C of the Income Tax Act. Additionally, in the NPS scheme, the contribution made by the employer and the employee are both relevant for the tax exemption.
- 80CCD (1) – This is a part WS 80elf-contribution. The maximum reduction of up to 10% of the salary can be claimed for tax exemption under this section. For self-employed taxpayers, this limit is 20% of the gross income.
- 80CCD (2) – In this section, the contribution made by the employers towards the National Pension Scheme. This benefit does not apply to self-employed taxpayers. The maximum amount allowed to the tax exemption is the lowest of the:Â
-
- Actual NPS contribution by the employer.
- 10% of Basic + Dearness Allowance.
- Gross total income.
We can claim any additional self contribution (up to Rs 50,000) under section 80CCD(1 8) as National Pension Scheme (NPS) tax benefit.
National Pension Scheme (NPS) Interest Rate
NPS allows a current interest rate of 996-12% depending on the subscribers and type of scheme. National Pension System provides various options of investment to the subscribers and also provides them the option to choose the fund managers as per their choice. Depending on the scheme chosen by the investors NPS provides an interest rate of up to 9%-12% as compared to other investment instruments.
Returns on National Pension Scheme
NPS returns are issued by the fund managers acting on behalf of the National Pension Scheme. A recipient can select from 8 different pension fund managers (PFM), depending on the asset groups (equity, corporate bonds, alternate assets, and government bonds), tier, and split the total investment accordingly. The returns earned from the National Pension Scheme depend on the asset allocation and PFM an investor opt form.
NPS is ideal for long-term investments, so the returns increase by an allocation amount depending on the asset classes. Though, in NPS there is no pre-determined compounding rate for National Pension Scheme returns. An investor can decide the return with the help of the Compounded Annual Growth Rate of each asset over time.
NPS Calculator
NPS Calculator is a tool that we can use to estimate our future monthly pension and potential investment corpus created through deposits into the NPS account till retirement. NPS calculator typically features the following fields:
- Date of Birth – It is used to calculate our current age and figure out for how many years we will be making NPS deposits.
- Contribution – It can be annual, bi-annual, quarterly, or monthly and shows the periodic contribution being made to the National Pension Schemes Tier 1 account (Tier 2 account does not have tax benefits or withdrawal limitations).
- Expected rate of return – NPS investments are market-linked so their returns cannot be predicted in advance. Therefore, the estimated rate of return (expressed as a percentage) is used to calculate the future corpus value of our NPS contributions. The higher the value in this field, the higher is the final corpus size.
- Annuity Purchase – This percentage figure shows the portion of our NPS future corpus that will be used to purchase annuities that define our monthly pension after retirement. Under existing rules, a minimum of 40% of the NPS corpus is to be compulsorily used for the purchase of annuities. The higher the portion of NPS future corpus utilized for annuity purchase, the greater will be the monthly pension that we will get.
- Annuity Rate – It is the expected rate at which annuities are supposed to grow after our retirement. A higher annuity rate will lead to a higher pension payout. Though, the annuity rate is also market-linked hence, cannot be estimated accurately in advance.
NPS Calculator Results
The NPS calculator will show the monthly pension amount that we are likely to receive after our retirement. Additionally, we will also get data about the principal amount invested, the returns earned as well as a break-up of the annuity corpus and lump sum payout. These results received from the NPS calculator are however subject to the following limitations:
- NPS as market-linked, the corpus amount is estimate based on user input only.
- NPS calculator uses the compound interest calculator to give its results so the actual growth of the corpus will not match the estimated growth of the corpus.
- The growth of annuity corpus is also market-linked hence the estimate may be very different from the actual payout at retirement.
Banks that provide NPSÂ Â
- HDFC National Pension Scheme
- ICICI Bank National Pension System
- NPS Withdrawal Forms
- PFRDA
- POP and CRA Charges under NPS
- Axis Bank National Pension System
- Bank of Baroda National Pension System
- Bank of Maharashtra New Pension Scheme
- Central bank of India New Pension Scheme
- South Indian Bank New Pension Scheme
- Canara Bank New Pension System
- Corporation Bank New Pension Scheme
- Federal Bank New Pension Scheme
- IDBI New Pension Scheme
How to open an NPS account?
An investor can open an NPS account both online and offline.
NPS Online Investment Process
Follow the steps mention below for investment in NPS scheme online and KYC verification:
- Visit the eNPS website to register
- Link your PAN number, mobile number, and Aadhar number to the NPS account
- Validate your registration using the OTP got at your registered mobile number for a successful KYC verification
- After successful registration, Permanent Retirement Account Number (PRAN) will be received. PRAN is required to login into the National Pension System account.
NPS Offline Investment Process
Follow the steps mention below to apply for an NPS account offline:
- Visit the nearest Point of Presence (POP) center branch, post office, or bank branch and collect the application form
- Fill the application form, sign, and submit it along with Know Your Customer (KYC) documents.Â
- For the first investment towards NPS, the POP center will send the PRAN along with the password
- A registration fee for offline registration of Rs 125.
Summing it up
National Pension System is a retirement solution intended to give a regular income after retirement. It invests a portion of the funds in equity and this portion is shown to market fluctuations, risks, and rewards. Additionally, the quantum of exposure in equity is dependent on various factors. With the aim to save tax and create wealth, an investor can also explore SIP, equity-oriented mutual funds, debt-oriented mutual funds.
These options are also presented to market fluctuations and risk but come with the bonus of higher returns. Moreover, depending on how much risk an investor wants to take depending on his cost of living and earnings, the decision could be made.
Frequently Asked Question- NPS
Q1. Who can make investments with the National Pension System?
Ans. Any Indian citizen between the age group of 18 and 60 complying with the KYC requirements and qualifying for either of the NPS models can invest with the system.
Q2. Is saving with the National Pension System allowed for an NRI?
Ans. Yes, an NRI can opt for the National Pension Scheme for retirement corpus creation provided he/she maintains the residential status until exit from the scheme.
Q3. Can an individual invest in more than one National Pension Scheme?
Ans. No, the scheme comes with a unique PRAN for each individual and thus does not allow multiple accounts for a single person.
Q4. What is the reason behind the compulsory utilization of a minimum of 40% of the accumulated pension funds to buy annuities after retirement?
Ans. The main reason behind this move is to ensure employees in government service will still obtain a regular and stable income every month following their retirement.
Q5. Which body is responsible for the calculation of interest with regard to the NPS?
Ans. The interest is calculated by the Pension Accounting Office, which is the official body appointed for this particular task.
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