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What is National Pension Scheme in India?

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What is National Pension Scheme in India?

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Retirement may be a long time from now, but if we don’t plan it as early as possible, our sunset years might become a tough phase to live. This is why a plan like the national pension scheme is there to support us. With rising prices and standard of living, the importance of having a passive income source cannot be stressed enough, especially after we retire. Even if you’re nowhere close to retiring, maybe reading about the national pension scheme will trigger the thought of considering it. Let me explain below.

What is National Pension Scheme?

Launched in 2004, the national pension scheme is a voluntary investment scheme that comes under the purview of the Central government and the PFRDA (Pension Fund Regulatory and Development Authority). 

Initially, it was only meant for government employees, but in 2009, they opened it to everyone, including the private sector. However, military officials are not eligible for the national pension scheme. 

The national pension scheme intends to cultivate the habit of saving for retirement. It is an effort to discover a long-term solution to the issue of giving each Indian person a sufficient retirement income. During their working years, individuals who are members of the national pension scheme can make monthly contributions to a pension account, withdraw a portion of the capital all at once, and utilise the balance to purchase an annuity to ensure a steady income after retirement.

There are four types of investments in NPS: corporate debt, government bonds, and alternative investment funds. In addition, a number of portfolio managers and investment alternatives are available in NPS. The subscriber chooses the portfolio managers initially, and after choosing, the subscriber has the choice of any investment alternatives.

Types of National Pension Scheme Account

These accounts are divided into two tiers that are listed below.

Tier-I

This is the type of retirement account into which the subscriber's regular payments are credited and invested in accordance with the fund manager or the portfolio the subscriber has selected. This account is mandatory for long-term savings. 

Tier-II

This is a voluntary account that can only be used if the subscriber has an active Tier I account. Withdrawals of any amount (including the entire amount) can be made at any time.

Here are a few more details about both types of accounts. 

Eligibility criteria for NPS pension

Before we dive into more details, let's have a quick look at the eligibility criteria for NPS Pension Plan. 

Features & Benefits of the National Pension Scheme

If you’re going to invest in a plan that is crucial for your evening years, then it’s important to know what the features are:

Guaranteed Returns

Compared to other conventional tax-saving investments like PPF, it provides higher returns. Would you believe it that you can earn up to 12% returns on a secure investment?

Additionally, if you are unhappy with the fund's performance, NPS also allows you to switch fund managers.

Risk Evaluation

For the National Pension Scheme, there is now a limit on equity investment from 75% to 50%, and for government employees, it is 50%. In the specific limits, the equity component will decrease by 2.5% each year, beginning with the year the investor reaches the age of 50.

However, the maximum exposure is set at 50% for investors who are 60 years of age and older. As a result, the risk-return relationship is stabilised in the interest of investors, protecting the corpus to some extent from the volatility of the equity market. Furthermore, the NPS pension has a better earning potential than other fixed-income programs.

Portable

NPS pension offers effortless mobility across professions and places. In contrast to many pension programs in India, it would allow individual members to move to a new job or area without worrying about leaving behind the capital built up.

Regulated Scheme

NPS is subject to PFRDA regulation, and NPS Trust regularly monitors and evaluates the performance of fund managers. Comparing NPS's account maintenance fees to those of similar pension schemes offered worldwide, they are the lowest. 

Tax Benefit

You may claim up to ₹1.5 Lakhs deduction for NPS tax benefit. The maximum deduction that can be made under section 80CCD(1) is 10% of the employee's pay. This limit is set at 20% of the gross income for self-employed taxpayers.

The employer's NPS payment is covered by Section 80CCD(2) and is not included in Section 80C. Those who are self-employed taxpayers are not eligible for this benefit. Additionally, under section 80CCD(1B), you may deduct any extra self contributions (up to ₹50,000) as a tax advantage for NPS. Therefore, the program permits a total tax deduction of up to ₹2 Lakhs.

How to Open a National Pension Scheme Account?

You can open a National Pension Scheme through online or offline modes. 

Online 

Here are the steps to follow. 

  • Visit the online website of the National Pension System https://enps.nsdl.com/eNPS/NationalPensionSystem.html
  • Click on ‘National Pension System’ tab.
  • You will be redirected to a new page. Fill in the form carefully to register yourself.
  • Don’t forget to link your account with your PAN card, Aadhaar card, and mobile number. 
  • After providing the details, click on ‘Generate OTP.’
  • Enter the OTP to complete the registration process. 
  • Next, PRAN (Permanent Retirement Account Number) will be generated, which you can use to log in to the page for further use.

Offline 

Here are the steps to follow.

  • To begin, find a PoP (Point of Presence) near you.
  • Visit the branch and pick up an account opening form from the PoP.
  • Submit the form along with the KYC documents.
  • Next, you are required to choose a minimum contribution of ₹250 or ₹500 (monthly) or ₹1,000 (annually). 
  • A one-time registration fee of ₹125 is required for this procedure.
  • Once it's done, the PoP will provide you with a Permanent Retirement Account Number (PRAN).
  • You may manage your account using this number and the password in your sealed welcome package. 

Fees & Charges of National Pension Scheme 

Here is the list of applicable charges & fees associated with the National Pension Scheme. 

Disclaimer: Fees & charges are as per 2022 and subject to change as per financial institutions’ policy

In a nutshell

Everyone strives to spend their retired life tension free. We all are busy planning our future to attain the goals we desire, why not start planning for your retirement as well? And the NPS pension scheme is one to help you build a corpus. Ensure you thoroughly understand and research this plan before taking the plunge.

FAQs

What are the different schemes in NPS?

There are four types of investments in NPS: corporate debt, government bonds, and alternative investment funds. In addition to this, a number of portfolio managers and investment alternatives are available in NPS. The subscriber can choose the portfolio manager initially, and after choosing, the subscriber has the choice of choosing any of the investment alternatives.

What is meant by National Pension Scheme?

National Pension Scheme is a voluntary investment scheme done for a longer tenure. It was launched in 2004. Under this scheme, you can invest to gain returns after your retirement. The Central government and the PFRDA (Pension Fund Regulatory and Development Authority) are in charge of the National Pension Scheme (NPS) India.

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