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NPS Account - National Pension Scheme, its Features & Benefits

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NPS Account - National Pension Scheme, its Features & Benefits

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Well, retirement may sound hunky-dory, but most of us do jobs not only because it brings purpose and structure to our lives but let’s face it, a job is what pays the bills. 

Want a life of relaxed retirement without the stress of reduction in income? Then a pension scheme is what you are looking for. A pension abates the loss of income; additionally, some schemes even provide tax benefits. 

One such scheme is the National Pension System (NPS), which is introduced by the Government of India. The benefits of NPS hope to provide a post-retirement income to its subscribers. 

So, what is the benefit of the NPS scheme and most importantly, what is the NPS? Let’s begin with first understanding the scheme.

What is The NPS?

The NPS (National Pension Scheme) was initiated in the year 2004. The scheme’s purpose is for people to accrue the benefits of NPS once they commence retirement life. Originally the scheme was only meant for public sector employees but much to our benefit in 2009, the scope broadened. It now allows all Indian citizens to avail the benefits of NPS. Preparing for retirement is much like planting a sampling; while its hard work is during the initial years - it pays off by becoming a huge sheltering tree. A fruit that you make pluck from this tree while it grows is the eligibility for tax deductions as per Sections 80C and 80CCD, which is another benefit of NPS.

We’ve got on to understanding what the NPS is? However, it is equally important to know:

How the NPS Works:

This is a market-linked scheme and contributions can be made to the scheme until retirement. Professional fund managers undertake the investment made in the scheme. Once you reach the age of 60, 60% of the corpus can be withdrawn, and with the other 40%, it is mandatory to purchase an annuity - this helps create income even post-retirement. 

If you are planning to invest in a scheme which is going to come in handy when the sun sets, then it is important to know more about the scheme.

Some vital features of the NPS are:

  • Structure:

The NPS is a scheme that does not allow premature withdrawal. However, under special circumstances, it permits partial withdrawals. There are two categories available to the investors:

  • Tier I account:

This does not permit withdrawals. They can only be made post concluding the exit conditions that are prescribed in the scheme.

  • Tier-II account:

This account allows voluntary withdrawal, which comes into effect only after activating the Tier I account. This account permits withdrawals as and when the subscriber needs to. 

  • Choice of fund managers:

The NPS gives the subscribers to the scheme an option to choose between 8 fund managers.

  • Active Vs Auto:

The investors also have a choice between the type of investment strategies:

  • Active is for investors who are looking for more control over how their assets are allocated.
  • Auto is for investors that are interested in being passive.
  • Permanent Retirement Account Number (PRAN):

The NPS gives the subscriber a unique number known as PRAN, a lifetime number. This is to ensure seamless portability.

We have now understood the NPS in sufficient detail but are still missing the details that should help seal the deal:

What are the benefits of the NPS?

There are many benefits to the NPS; here are a few of them:

1. Returns:

A chunk of the investment made into the scheme is allocated to equities. These offer a higher rate than traditional financial products. The scheme aims to fetch an interest rate ranging between 9-12%.

2. Tax Benefits:

A major benefit of the NPS is the tax exemption. According to Section 80C of the Income Tax Act, the investor is eligible to avail of a tax deduction up to ₹1.5 lakhs. You can get an additional ₹50,000 benefit under section 80CCD.

3. Flexibility:

The scheme also allows the investor to avail a change of the fund manager if they are not satisfied with the fund’s performance. All that needs to be done to avail of this benefit of the NPS is filling up the form online or offline, paying a transaction charge for changing the fund manager, et voila - it’s done. 

4. Risk:

Currently, the maximum equity risk exposure is at about 75%. For government employees aged more than 60 years, it has an upper limit of 50%. As soon as the investor is 50 years old, the equity component reduces by 2.5% per year, reducing the risk arising due to market volatility. 

In Conclusion

We all strive to spend our retirements stress-free. We spend most of our lives wondering about retirement. Why not start planning now? The Fi app would make this process smoother right from the comfort of our homes. Saying goodbye to the 9-5 grind sounds like music to the ears, and you can dance comfortably to this melody even at the age of 60 if you add a retirement plan to your bucket list. So start investing now to avail benefits of the NPS to ensure that your life is idyllic post-retirement. 

Frequently Asked Questions

1)What are the advantages of NPS?

Some of the benefits of the NPS are:

  • Fund Managed by professionals
  • High Returns
  • Flexibility
  • Low investment values
  • It is a regulated scheme

2)How much pension will I get?

This is dependent on the among of money invested and the duration of the investment. If you start investing ₹1000 per month till the age of 65 at, let’s say, a return of 10%., then after 40 years, when you turn 65, you will fetch a corpus of ₹63,76,781, and your monthly pension will be ₹12,754 if you take an annuity on 40% of the corpus at an expected rate of 6%. 

3)Who can avail of the benefits of the NPS?

Any citizen of India can register for the scheme between the ages of 18-60 and avail of its benefits.

4)Can an NRI register for the NPS scheme?

Yes, An NRI can also be a subscriber to the NPS; however, the account shall be closed if there is a change in the citizenship status.

5)Is there any requirement for a minimum contribution?

There is no upper limit on contributions. In the case of a tier 1 account for a minimum of ₹500 per contribution, you have to invest at least ₹1000 a year. For tier II accounts, the minimum contribution stands at ₹250.

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