‘Baby Boomers’ or our ‘Mommas’ and ‘Papas’ have been lucky to be the last generation of people who have received pensions from their employers, post-retirement. At least some of them did. At their time, it did not matter whether a person worked in a government school or a private company; they were eligible for a pension. However today, except for people working in Government services and organizations, the private sector does not offer pensions. Even the pension for Government employees may not be enough for the rising cost of living and deal with inflation.
National Pension Scheme is one such investment that can be made during an individual’s employed or self-employed days to sustain themselves post-retirement. This not only acts as savings but helps you to save tax as well, when you invest in it. It is indeed a gift that you give your future-self.
What is National Pension Scheme (NPS)?
The Government of India started the National Pension Scheme under the Pension Fund Regulatory and Development Authority (PFRDA). National Pension Scheme is an after retirement age security coverage to all citizens who have opted for this scheme. It is a voluntary scheme that can be subscribed for pre-retirement.
Tax Benefits of National Pension Scheme
Based on Union Budget 2019, NPS now qualifies to be an Exempt-Exempt-Exempt (EEE) category product. This means that NPS tax is exempted at all 3 stages. Here is how you benefit from it:
- Tax deductions up to 1.5 lakh per annum under Section 80CCD of the Income Tax Act.
- Additional tax deduction up to Rs. 50,000 under Section 80CCD(1B) in a financial year. (only Tier 1 accounts are eligible, not Tier 2)
- At term completion or 60 years, 60% of the amount received is free from tax, while the rest 40% has to be invested in annuity.
Other Benefits and Features of National Pension Scheme
National Pension Scheme comes loaded with certain features and benefits that can prove to be useful for both your long-term and short–term goals:
- Returns: You can expect a return of up to 12% NPS. The return percentage is dependent on the type of National Pension Scheme that an individual chooses which is then calculated by the government-appointed Pension Accounting Office.
- Regular Income Post-Retirement: The scheme investor is eligible to receive monthly pension amounts to be able to sustain a comfortable living for their future.
- Flexible: An NPS account can be operated from every nook and corner of India irrespective of individual employment and location. You can also switch between funds in NPS.
- Portable: NPS scheme holders can move from one sector to another like Private to Government or vice versa or Private to Corporate and vice versa. The NPS account will always be the same no matter wherever you go. Even if you leave your job, you can continue using the same account.
Eligibility Criteria for National Pension Scheme
The following criteria should be met to be eligible for investing in the National Pension Scheme:
- Applicant should be a citizen of India.
- He/she/they should be over 18 years of age and less than 60 years of age.
Types of National Pension Scheme Accounts
There are two types of accounts for NPS and individual may subscribe for:
- Tier 1
It is a mandatory account for all those who opt for NPS.
- The Government employees have to contribute 10% of their salary (salary = basic + DA), and the government will make equal contributions as well.
- For others opting this scheme, the initial contribution is Rs. 500/- at the time of account opening and minimum annual contribution is Rs. 1000.
- Tier 2
Not a compulsory account like Tier 1. You can withdraw funds at any time, and hence, it provides high liquidity. There are no contributions from the government or the employers and include no tax exemptions either. There are three critical points to make a note of:
- The minimum amount required to open this account is Rs. 1000/-
- Minimum monthly contributions amount to Rs. 200/-
- Necessary to hold a minimum balance of Rs. 200/- every financial year.
What Investment Options Do I Get?
- Active-choice: With this investment option, an investor gets to mix equity, corporate debt, and government securities as per his/ her choice. However, the allocation of equity can be a maximum of 50%.
- Auto- choice: Allocation is done based on the investor’s age.
|Equity||Till the age of 35, the equity portion is 50%, post which it reduces 2% yearly till it becomes 10% by the age of 55.|
|Corporate Debt||Till the age of 35, the corporate debt is 30 %, post which it reduces 1% every year until it becomes 10% by the age of 55.|
|Other Options||1. Aggressive life-cycle fund – begin with an equity allocation of 75%
2. Conservative life-cycle fund – start with an equity allocation of 25%
Reduce as per the investor’s age advances.
Where to Create an NPS Account?
Opening an NPS account is not that difficult now, it’s just a click away. You can easily invest in NPS online through the Fisdom App. We are a new-age app that makes it easy to invest in mutual funds, in a matter of minutes.
Withdrawal and Exit From NPS Account
If you retire at 60:
- 40% of withdrawals are free from tax.
- From the balance 60%, 40% minimum has to be used to purchase an annuity. The remaining 20% can be used to either buy an annuity or withdrawn by paying tax according to the tax slab.
If you retire before 60 years:
- You would use 80% of your corpus to buy an annuity.
- And withdraw the remaining 20% by paying the amount taxable according to the tax slab.
Remember, the taxation of the amount via annuity is according to your tax slab. In the event of the account holder’s death, the nominee receives the entire amount.
Documentation for NPS Withdrawal
There are certain documents that require to be submitted for withdrawing money from your NPS account:
- A filled and signed withdrawal form
- Original PRAN card
- Copy of your Proof of Identity which must be self-attested
- A cancelled cheque of your active bank account
Now that you have a good idea about a National Pension Scheme and how it works it’s never too late to open an NPS account on Fisdom App.