National Pension Scheme - Features, Types & Benefits

Financial planning has naturally been at the core of securing retirement, and 'Save for retirement' is perhaps one of the mottos under which investors are opting for comprehensive investment opportunities that will grow with the strength of being secure. Here, one of the investments that have highly emerged as a consideration in this scenario would be the National Pension Scheme. It is designed to maturity the individual with a well-planned and regulated retirement savings platform, incorporating various investment options and permutations to suit the multiple financial objectives.

The National Pension System is a long-term and voluntary investment scheme which the Pension Fund Regulatory and Development Authority (PFRDA) along with the Central Government have facilitated for helping its subscribers after retirement.

Systematic investment in National Pension scheme during the period of employment ensures that the subscriber accumulates enough funds after their retirement that can be utilized by the subscriber according to their need. Here are more details on the National Pension System.

What is the National Pension Scheme

The National Pension Scheme (NPS) in India is a voluntary long-term retirement investment plan administered by the Pension Fund Regulatory and Development Authority (PFRDA) and the central government.

The National Pension Scheme or NPS is social security initiated by the Central Government. Any employee from the public, private sectors and even the unorganised sectors can avail this pensionary scheme except for the people representing the armed forces.

The scheme promotes investing in a pension account at an interval throughout the employee's duration. Once retired, one can withdraw a percentage of the corpus. As an NPS account holder, the rest will be returned as pension, paid at your own discretion as monthly pension post your retirement.

In the system, individual subscriber contributions to the National Pensions Scheme accumulate till retirement and corpus grows through market-linked returns. The subscribers can also leave this plan prior to retirement or superannuate. However, through this scheme, a portion of savings is utilized for providing retirement benefits to a subscriber.

Upon retirement, departure, or superannuation, at least 40% of contributions are used to purchase an annuity for a lifetime pension. The subscriber receives the remaining amount in a single lump sum payment.

Features of NPS

This is the National Pension System, a voluntary, long-term retirement savings scheme designed to allow systematic savings for the people of India. It was set up in 2004 by the Government of India and managed by the Pension Fund Regulatory and Development Authority. Here are some of the key features of the National Pension Scheme:

Voluntary and Long-Term Contribution Savings:

NPS is a voluntary retirement saving scheme that permits people to contribute regularly, generating a corpus over the long run towards their retirement. During their working years, subscribers can make regular contributions to their NPS account. These contributions are then invested in numerous financial instruments to generate returns.

Flexibility

NPS offers flexibility in choice of investment options and change in POP, investment pattern, fund manager, and no. of investment subscriptions. This ensures that the individual can optimize returns as per their comfort with different asset classes and fund managers.

Individual & Corporate Membership

NPS is accessible both to individuals and to corporate entities. Individuals can directly open an NPS account, while corporate entities can help employees open NPS accounts through the Corporate NPS (C-NPS) model.

Annuity Options:

Subscribers can utilize their retirement savings to buy an annuity that delivers a consistent stream of income. There are several available annuity options. NPS account holders may transfer their Superannuation funds to their NPS account without any tax implications after requisite approvals

Asset Allocation:

NPS allows subscribers to invest with flexible asset allocation. Subscribers can choose from various asset classes, including equity, government bonds, corporate debt, and alternative assets.

Professional Fund Management:

NPS funds are seen by professional fund managers hired by Pension Fund Managers (PFMs). Subscribers can choose their fund manager based on risk appetite and investment preferences.

Tax Benefits:

Contributions made to the NPS are eligible for tax benefits under Section 80CCD of the Income Tax Act. In addition, there is special deduction for employers' contributions to the NPS made under Section 80CCD(2).

Exit and Withdrawals:

NPS also permits partial withdrawals for specific purposes like higher education, marriage, and purchase of a house. When subscribers reach retirement age, they can withdraw a lump sum and use the remaining funds to purchase an annuity. It is also very important to mention that the features of the National Pension Scheme can change from time to time due to new regulations or government policies. So, one should be updated with the latest developments and consult with financial consultants to get advice in their specific case.

Types of NPS Accounts

The NPS offers two types of accounts - Tier I and Tier II. The former is the default account, whereas the latter is a discretionary addition. The table below describes the two account kinds in detail. The NPS scheme enables people to shift to systematic investments into the two accounts. The account opening for NPS requires generating the Permanent Retirement Account Number(PRAN) for every subscriber.

Tier-I account

• This is a pension account, and the amount withdrawn from it shall be strictly within certain limits. A person can open this account by depositing at least Rs. 500.

• Account benefits are available after subscriber attains age of 60

• Subscriber can make partial withdrawal under certain circumstances or events such as completion of 3 years of service or critical illness or expenditure on children's education, marriage or house expenses etc.

• Subscriber can withdraw upto 50% of the corpus after 25 years of service

• Tier-I account is a must and will be automatically activated when the account is open to ensure a considerable corpus at retirement.

• Opening an NPS account provides tax benefits under Sections 80CCD (1), 80CCD (1B), and 80CCD (2).

Tier-II account

• They are voluntary accounts providing liquidity of funds through investments and withdrawals

• The minimum deposit one is required to make for Tier II account is Rs. 250. However, investments in Tier-II accounts are permitted only after an active Tier I account exists in the subscriber's name.

• This voluntary account functions similarly to traditional investing accounts.

• Tier-I account is mandatory for opening Tier-II account.

• In contrast to the Tier I account, you can withdraw funds whenever you want.

• The minimal contribution per installment is ₹250, with no minimum balance requirement.

• Investments in the NPS Tier II account do not qualify for tax breaks, and returns are taxable.

• There is no lock-in period, and you can designate a distinct scheme preference and nomination for your Tier II account.

• The Tier II account is liquid, and one can withdraw an unlimited amount from this account. It is a good source of liquidity in emergencies.

NPS Tax Benefits

The principal benefit you get from an NPS account is that it helps you save your taxes. You are eligible for a tax benefit of up to Rs 1.5 lakhs. It is available on the contribution that you make towards your NPS account under Section 80C of the Income Tax Act.

The deduction is available under the following two heads for NPS contribution:

a) Section 80CCD (1)

This deduction is available for self-contribution. This is the amount that you invest in your NPS account. The maximum deduction is allowed upto 10% of your salary. If you are self-employed then the deduction is up to 20% of your total income.

b) Section 80CCD (2)

This deduction is available for the contribution made by the employer to your account. This is only applicable to you if you are a salaried person. The deduction allowed is the lower of,

• 10% of Basic Salary + DA

• Amount contributed by your employer

• Gross total income

An additional deduction of Rs. 50,000 over and above the standard deduction of Rs. 1.5 Lakhs can also be claimed.

Partial withdrawals from NPS, the sum withdrawn is upto 25% of self-contribution, tax exemption available, subject to the circumstances and criteria prescribed by PFRDA under section 10(12B).

Conclusion

The lesson here is that early, informed participation in the NPS is the first step to making it maximally beneficial. Knowing what constitutes contribution, asset allocation, and investment options will help the member determine which of these best matches his or her goals and risk profiles and hence have a good NPS strategy.

Besides this, the NPS commitment to transparency coupled with its focus on long-term wealth creation positions it as an option in this very changing economic landscape.