What is the NPS Scheme?

The National Pension System (NPS) is a voluntary, contributory retirement savings scheme initiated by the Government of India. Launched in 2004, the NPS is regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA). Its primary objective is to provide retirement income to individuals, ensuring financial security during their golden years.

Features of the NPS Scheme

The NPS scheme offers several features that make it an attractive investment option for individuals in India. Let's explore some of its key characteristics:

Voluntary and Flexible:

The NPS scheme is open to all Indian citizens, including salaried employees, self-employed individuals, and Non-Resident Indians (NRIs) and OCIs between the ages of 18 and 70 years. It allows subscribers to contribute to their pension account regularly and offers flexibility in choosing the amount and frequency of contributions.

Investment Options:

NPS provides subscribers with two investment choices: Active Choice and Auto Choice. Under Active Choice, individuals can decide the allocation of their contributions across four asset classes—Equity, Corporate Bonds, Government Securities, and Alternative Investment Funds (AIFs).

Auto Choice, on the other hand, offers an age-based asset allocation approach, gradually shifting investments from equities to debt as the subscriber grows older.

NPS subscribers can choose the Auto-choice option (life stage investing option) if they are unable to choose their own asset allocation. According to this choice, money is distributed according to subscriber age. Additional sets of three risk-based investment options (LC25, LC50, and LC75) are available under the Auto Choice option.

Conservative Life Cycle Fund (LC25): The total asset allocation for asset class E is capped at 25% under the LC25 until you reach the age of 35 years. Then, as you get older, it goes down.

Moderate Life Cycle Fund (LC50): The total asset allocation for asset class E is capped at 50% for the LC50 until you reach the age of 35 years. Then, as you get older, it goes down.

Aggressive Life Cycle Fund (LC75): The total asset allocation for asset class E is capped at 75% for the LC75 until the age of 35. Then, as you get older, the equity decreases.

Tax Benefits*:

The NPS scheme offers attractive tax benefits* to subscribers. Contributions made towards the NPS Tier I account are eligible for a deduction under Section 80C of the Income Tax Act, up to a maximum of ₹1.5 lakh per year. Additionally, contributions up to 10% of the salary (basic pay + dearness allowance) made by employees and matched by employers are deductible under Section 80CCD (2). under New tax regime only the corporate contribution is available with 14% of the Basic+DA* u/s 80CCD(2). The overall capping while calculating the employer contribution tax benefit is capped at INR 750,000 including the Employer’s contributions towards PF + SAF + NPS in totality. Furthermore, subscribers can avail of an exclusive additional deduction of up to ₹50,000 under Section 80CCD(1B), commonly known as the NPS tax benefit*.

Benefits of the NPS Scheme

Now that we've explored the features of the NPS scheme, let's delve into the benefits it offers:

Retirement Corpus:

The NPS scheme allows individuals to accumulate a substantial retirement corpus over time. By contributing regularly and benefiting from the power of compounding, subscribers can build a sizeable fund that ensures a comfortable retirement.

Professional Fund Management:

The NPS investments are managed by Pension Fund Managers (PFMs) appointed by the PFRDA. These PFMs are regulated entities with expertise in managing pension funds. Their professional knowledge and experience help in optimizing investment returns and minimizing risk.

Portability and Accessibility:

One of the key advantages of the NPS scheme is its portability. Subscribers can access their NPS account from anywhere in India and even abroad. This flexibility ensures that individuals can continue contributing to their accounts regardless of changes in employment or location.

Transparency and Control:

The NPS scheme promotes transparency by providing regular updates on the investment performance of the subscriber's pension account. Subscribers have access to their account statements, which detail the contributions made, investment allocation, and overall growth of their retirement corpus. This transparency empowers individuals to make informed decisions about their pension investments.

Annuity Options:

At the time of retirement, subscribers can utilize the accumulated NPS corpus to purchase an annuity plan from an Insurance Regulatory and Development Authority (IRDA) approved annuity service provider. The annuity plan provides a regular stream of income to the retiree, ensuring financial stability during the post-retirement phase.

Eligibility for the NPS Scheme

To be eligible for the NPS scheme, individuals must meet certain criteria:

Age: The minimum age to join the NPS is 18 years, while the maximum age is 70 years.

Citizenship: The NPS is open to all Indian citizens, NRIs, OIC, and PIOs.

KYC Compliance: Subscribers need to complete the Know Your Customer (KYC) requirements, which involve providing identity proof, address proof, and a recent photograph.

Permanent Retirement Account Number (PRAN): Individuals are required to obtain a Permanent Retirement Account Number (PRAN) to enroll in the NPS scheme. PRAN serves as a unique identification number for each subscriber and is essential for accessing the NPS account.

Bank Account: Subscribers must have an active bank account to facilitate contributions and withdrawals from the NPS account.

Conclusion

NPS is a well-structured retirement savings scheme that offers individuals in India a reliable and flexible investment option. With its voluntary nature, investment choices, and attractive tax benefits, the NPS scheme empowers individuals to build a substantial retirement corpus. Professional fund management, portability, accessibility, annuity options, and transparency further enhance the appeal of the scheme. By understanding the eligibility criteria and taking advantage of the features and benefits offered by the NPS, individuals can secure their financial future and enjoy a comfortable retirement. So, if you haven't already, consider enrolling in the NPS and taking the first step toward a financially secure retirement.

Frequently Asked Questions

What is NPS?

The National Pension System (NPS) is a defined contribution pension scheme that was launched by the Government of India in 2004. It is a voluntary retirement savings scheme that is open to all citizens of India, irrespective of their age, occupation, or income.

What happens to my money in NPS after I retire?

When you retire, you can choose to receive your pension in a lump sum and in a monthly instalment as a pension.

Disclaimers

*Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.