What is NPS (National Pension System) | NPS Scheme
The National Pension System (NPS) is a
contribution scheme launched by Indian Government. NPS Scheme is a defined
contribution retirement savings scheme in which the contributions are invested
in a mix of assets and the retirement corpus is subject to returns from those
assets. The returns in National Pension Scheme are market-connected.
The professional pension fund managers are entrusted with the task of managing the investor's money. NPS Scheme is an attempt to ensure that the country’s citizen would earn a stable income after their retirement along with helping them earn good returns on their investment.
In this post, I will try to clarify few things about the National Pension System that you need to know.
National Pension System | NPS Scheme
The National Pension Scheme was launched on 1 January 2004 for newly employed central
government employees. But from the 1 May 2009, the National Pension System was made open to all citizens of
the country between the age of 18 and 60, including self-employed professionals and others who work in the unorganized sector on a voluntary
basis.
Eligibility
Criteria for NPS Scheme
All
Indian citizens between the age
of 18 years and 65 years can join NPS scheme. The only condition is
that the subscriber should adhere to the KYC (Know Your Customer) norms. NRI
can also join National Pension System. However, the account will be closed if
there is a change in the citizenship of the NRI.
Documents required for opening an NPS Account
Any
Individual who wants to get registered as a subscriber and wants to open an NPS
account should submit the duly filled subscriber registration form with other
supporting KYC documents (proof of identity, address, and date of birth) to the POP.
Minimum Contribution in NPS Scheme
Start
contributing in Tier I account with at least Rs. 500. The minimum contribution
in Tier I account is Rs. 1000 for a financial year. Over and above this limit,
you can contribute any amount at any frequency. For opening Tier II account,
you have to pay an initial contribution
of only Rs. 1000. Tier II account gives you the flexibility to invest any time
through any POP.
Types of Accounts under NPS Scheme
Under
National Pension System, an investor can open two accounts: Tier I and Tier II
accounts.
Tier I Account
The
primary account, which is a non-withdrawable permanent retirement account. You
can not withdraw entire money from this account till your retirement. Even,
there are restrictions on withdrawal on
retirement. Partial withdrawals are allowed on certain conditions. All the tax
benefits that NPS scheme offers are applicable only to Tier I account.
Tier II Account
It is
a voluntary savings account from which investors are free to withdraw their
savings whenever he/she wishes. Tier II account is an investment account,
similar to a mutual fund in characteristics. An active Tier I account is a
pre-requisite for opening a Tier II account.
Benefits of National Pension System | NPS Scheme
Following are the benefits of National Pension System
(NPS)
1. It
is voluntary: NPS scheme is open to every Indian citizen and is entirely voluntary. A subscriber can choose the
amount he/she wants to contribute and save every year.
2. It
is simple: The application process is very simple and convenient. The
subscriber has to do is to open an account with any of the POPs (Point Of
Presence) and get a PRAN.
3. It
is flexible: It allows subscribers to choose their own investment option
and pension fund and see their money grow.
4. It
is portable: The subscribers can operate their NPS account from anywhere
in India, even they change the city, job or their fund manager.
5. It
is regulated: PFRDA regulates the NPS, with transparent investment norms
and regular monitoring and performances review of fund managers by NPS Trust.
Tax Benefits under National Pension System | NPS Scheme
Following are the tax benefits under National Pension
System (NPS)
1. Tax Benefit for Individual: Any individual who
contributes in NPS scheme can claim a tax deduction up to 10% of the salary (Basic+DA) under
Section 80CCD(1) within the overall limit
of Rs. 1.5 lakh under Section 80CCE. For self-employed individuals, this limit is 20% of gross income.
2. Tax
Benefit for Corporate Subscriber: Additional tax benefit is also available
to subscribers under corporate sector under Section 80CCD(2) of Income Tax Act.
The employer’s contribution (towards the employee’s NPS) up to 10% of salary
(Basic + Dearness Allowance) without any monetary limit is deductible from the
taxable income.
3.
Exclusive Tax Benefit under Section 80CCD(1B): The subscriber is allowed
an additional deduction of Rs.50,000 from gross taxable income for investing in
NPS under Section 80CCD(1B). This deduction is over and above the maximum tax
deduction of Rs. 1.5 lakh under Section 80C of Income Tax Act 1961.
Note: Tax
benefits are applicable for investment in Tier I account only.
Withdrawals under National Pension System | NPS Scheme
As per
PFRDA (Pension Fund Regulatory & Development Authority) exit rules,
following withdrawal categories are allowed:
1. Upon Normal Superannuation
At
least 40% of the corpus of the subscriber has to be utilized to buy an annuity
income from PFRDA listed insurance company and the balance is paid as lump
sum to the subscriber. In case the total corpus is less than Rs. 2 lakhs as on
the date of retirement (Govt sector)/attaining the age of 60 (Non-Govt sector),
the subscriber can avail the option of complete withdrawal.
2. Upon Death
The
entire corpus (100%) would be paid to the nominee/legal heir of the subscriber
and there would not be any purchase of annuity/monthly pension.
3. Exit from NPS scheme before the age of Normal Superannuation
At
least 80% of the corpus of the subscriber should be utilized for the purchase of an annuity providing the monthly
pension of the subscriber and the balance is paid as a lump sum to the
subscriber.
Note:
You can continue to contribute in your NPS account beyond the age of 60 years
but up to the age of 70 years.
Partial withdrawal under National Pension System |
NPS Scheme
Now you can withdraw up to
25% of the contributions made by you and standing
to your credit subject to conditions. To be eligible for partial withdrawal,
you must be in NPS scheme for a minimum period of 3 years. You can make a partial withdrawal for the following purposes;
1.
For higher education of your children or for self.
2.
For the marriage of your children.
3.
For treatment of serious specified diseases for self and family members.
4.
For setting up or acquiring a new business
5.
For the purchase or construction of a residential house/flat if you are not
having a residential house/flat.
You
are allowed to make a maximum of three
partial withdrawals during the entire tenure of subscription to NPS scheme.
Your partial withdrawals are tax-exempt.
You can also read: PPF (Public Provident Fund) - A popular saving scheme
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What is NPS (National Pension System) | NPS Scheme
What is NPS (National Pension System) | NPS Scheme
Very informative.
ReplyDeleteThanks Deepak.
DeleteI’m really impressed by the information this blog has given on earning money online from home.
ReplyDeleteThe National Pension System (NPS) was launched by the Indian government on January 1, 2004. The aim of this voluntary contribution-based pension scheme is to empower retired individuals to live off their retirement income. It’s regulated and administered by the PFRDA (Pension Fund Regulatory and Development Authority).
Although initially NPS was launched for new government recruits, from May 1, 2009, its perks were extended to all Indian citizens who wish to opt for this pension scheme. The bigger picture here is to encourage our generation to start saving for our future.
Thanks for the nice post.
ReplyDeleteThanks Pranita, I am glad you liked it.
DeleteGood information. Very beneficial. Thanks for sharing
ReplyDeleteThanks Sonal !
Delete