Planning for retirement is essential to ensure financial security and stability for the post-retirement phase. The National Pension Scheme (NPS) allows individuals to invest in a pension account and build a retirement corpus. This article will explore what NPS is, its features, and its benefits.
The National Pension Scheme is a social security scheme by the Central Government in which employees can make regular or lump-sum investments during their employment.
Previously, only Central Government employees were covered under NPS. Employees of the Central Government who started employment on or after January 1, 2004, are required to get NPS coverage mandatorily. However, the PFRDA has now opened it to all Indian nationals on a voluntary basis.
For everybody who works in the private sector and needs a fixed pension after retirement, the NPS programme is of great benefit. The programme has tax advantages under Sections 80C and 80CCD and is transferable between jobs and places.
Benefits of NPS
- Simple: The simplicity of NPS is its best feature. The complete process of account opening is very simple and can be done online. For this, you need a mobile number, Aadhaar, and Permanent Account Number (PAN). After your NPS account has been opened you will receive a PRAN number which you can use to login in the NPS portal to make transitions or changes in the scheme.
- Portable: If you change your work location you can operate this account from anywhere in India through the vast network of PoP (point of presence). If you have changed your employer you can use the same NPS account at your new employment location.
- Low Cost and Power of Compounding: it is one of the lowest-cost pension schemes which also gives its subscribers the benefit of compounding their investments.
- Independence: the lumpsum amount at 60 years of age and monthly pension provides financial freedom to subscribers in old age.
- Safety: this scheme is launched by the government of India and is managed by PFRDA. The investments in NPS are entirely safe.
|Scheme started in||2003|
|Returns||9% to 12% annualised returns|
|Benefits||Tax benefits on investments, monthly pension after retirement, good returns on investment|
|Lock-in period||Till 60 years of age of the subsciber|
|Minimum NPS contribution for opening an account||500 for Tier-I account and 1000 for Tier-II account|
|NPS Customer Care Number||1800 110 708|
Type of NPS accounts:
1. Tier-I account
It is the principal NPS account. Both employees and employers contribute to this account. Under this account, the tax benefit is available to both employees and employers. In tier-I Section 80C of the Income Tax Act permits deductions for contributions up to Rs.1,50,000 annually and Section 80CCD(1B) allows for additional deductions of Rs.50,000.
This account has a lock-in period till 60 years of age of the subscriber.
Minimum contributions for Tier-I
- Minimum amount per contribution – Rs 500
- Minimum contribution per year – Rs 6,000
- Minimum number of contributions per year -01
2. Tier-II account
It is similar to a savings account in which investment is voluntary. Any Indian citizen who has an active Tier-I account can open a Tier-II account.
There is no lock-in for this category but tax exemptions are not available under this category. Whatever investment you withdraw will be added to your income and will be taxed as per the applicable income tax bracket.
Minimum Contributions (For Tier-II)
- Minimum amount per contribution – Rs 250
- Minimum balance of Rs. 2000/- at the end of each financial year.
- Minimum number of contributions per year -01
You can transfer funds from EPF to Tier-I account, from Tier-II to Tier-I account but not from Tier-I to Tier-II account.
The maturity period of NPS
The maturity period for a Tier-I NPS account is 60 years. After 60 years you can withdraw up to 60% of the corpus in lumpsum which will be tax-free, for the rest you will have to purchase an annuity plan.
If you leave your employment before 60 then you can withdraw only up to 20% of the corpus in lumpsum, for the rest you will have to purchase an annuity plan.
However if your NPS corpus in upto 5 lakhs then you can withdraw the complete amount.
Pension from NPS
after the completion of 60 years, you will have to use at least 40% of your NPS investment to purchase an annuity plan from which you will get a monthly pension.
If you want to get more pension then will have to reduce your withdrawal amount at 60 years and invest a larger portion in the annuity.
You can use this NPS calculator to calculate the amount of pension you will receive monthly, based on your NPS INVESTMENTS and how much amount you want to invest in the annuity after maturity.
Withdrawal rules for NPS
There are three cases for withdrawal from the NPS account, First withdrawal upon maturity, second withdrawal before maturity and third withdrawal in case of death of the subscriber.
Let’s understand all these cases in detail:
1. Withdrawal upon maturity
When a subscriber reaches 60 years of age, he can withdraw up to 60% of his corpus as lumpsum and he will have to use at least 40% corpus to purchase an annuity which will be used to pay a monthly pension to the subscriber.
If your investment corpus is up to 5 lakh you can withdraw the complete amount upon maturity.
2. Premature withdrawal
If you want to exit before reaching 60 years of age then you will have to use at least 80% of your NPS corpus to purchase an annuity that will provide you a monthly pension.
You can not withdraw funds before completing 5 years.
If your total NPS corpus is up to 2.5 lakh, you can withdraw the complete amount in case of premature exit.
3. Withdrawal in case of death
In case of the death of the subscriber, the complete amount can be withdrawn by the nominee or legal heir of the subscriber.
The corpus received by the nominee or legal heir in case of the death of the subscriber will be fully tax exempted.
NPS is a safe and stable investment vehicle to provide lumpsum funds and a monthly pension after your superannuation or 60 years of age. There are two categories of NPS accounts Tier-I and TIER-II. Tier 1 is the main account under NPS which also offers tax exemption and provides a monthly pension upon superannuation. Withdrawals from NPS account can be done on maturity, before maturity or on the death of the subscriber.
When can a Subscriber exit from NPS?
As per PFRDA (Exits & Withdrawals under NPS) Regulations 2015, in the following conditions, the Subscriber can exit from NPS:
1. Upon Superannuation
2. Pre-mature Exit
3. Upon the Death of the Subscriber
Can I withdraw 100% from NPS?
You can withdraw 100% amount from NPS in two cases:
1. If upon maturity the total accumulated pension corpus is less than or equal to Rs. 5 lahks, Subscriber can opt for 100% lumpsum withdrawal.
2. In case of pre-mature exit If the total corpus is less than or equal to Rs. 2.5 lakh, subscribers can opt for 100% lumpsum withdrawal.
What are the conditions for Partial Withdrawal?
The following are the conditions of Conditional Withdrawal:
1. Subscribers should be in NPS at least for 3 years
2. The withdrawal amount will not exceed 25% of the contributions made by the Subscriber
3. Withdrawal can happen a maximum of three times during the entire tenure of the subscription.
4. Withdrawal is allowed only against the specified reasons, for example; Higher education of children, Marriage of children, For the purchase/construction of a residential house (in specified conditions), For treatment of Critical illnesses
What will happen to my Tier II contribution, in case of the closure of Tier I account?
Your Tier II account will also close once you request for closure of your Tier I account. Units under Tier II account will be redeemed and the amount will be transferred to your given bank account.