National Pension Scheme: Benefits and Returns

 

NPS is a long-term investment plan undertaken by the Central Government of India, which seeks to provide retirement benefits to employees in public, private and even unorganized sectors. The plan is regulated by the Pension Fund Development and Regulatory Authority (PFRDA) under the PFRDA Act of 2013. The plan is voluntary and administered by professional fund managers.

 

What is NPS?

The National Pension Plan (NPS) is a government initiative that began in January 2004 only for government employees. However, after 5 years that is in 2009, it was opened for all employees of the public and private sector in the country. Under this scheme, registered persons must contribute regularly during their working life. And upon retirement, account holders can withdraw a portion of the corpus in a lump sum and can use the remaining corpus to purchase an annuity to ensure a regular income after retirement.

Why NPS?

The NPS is a great scheme that helps you plan for retirement, plus it has a low-risk appetite that makes it all worthwhile.

Investing in NPS can be a boon for private sector employees who do not have retirement benefits, as investing in NPS will provide them with retirement benefits.

It’s even good for those looking for a tax-saving investment portfolio, as investments made under NPS are tax deductible under section 80C and 80CCD of the income tax law.

Returns and interest

Only a few know that a portion of the NPS goes to stocks that may not generate guaranteed returns on investments made. However, the returns generated are much higher than in other investments such as FPP and FD. So far, the scheme has been in place for over a decade and has delivered an annualized return of 8% to 10%, which is pretty good. Another benefit with NPS is that it allows you to change your fund manager in case you are not satisfied with the returns / performance of the fund.

Account types offered by NPS to its subscribers:

Level I: This is the main account and is the same as a pension account that has restrictions on withdrawals and use of the accumulated corpus.

• The account has a lockout period that is until the account holder turns 60. However, partial withdrawal is allowed under specific conditions.

• Contributions made to NPS Level I accounts are tax-free and tax deductible under Section 80CCD (1) and Section 80CCD (1B) of the Income Tax Act.

• In an NPS Level 1 account, one can contribute up to ₹ 2 lakhs and take advantage of a tax exemption for the amount invested, as per Section 80CCD (1) and 80CCD (1B).

Tier II: Tier II account provides more liquidity to your subscribers, helping them during emergencies.

•. Level II accounts are from subscribers with pre-existing Level I accounts and they can deposit and withdraw money at their convenience.

• This account is similar to a mutual fund account in features, but it offers no charge-out, no commissions, and good returns. However, the NPS Level 2 account offers tax benefits only to government employees under certain conditions.

Tax benefits for withdrawals

An NPS account holder can withdraw a lump sum of up to 60% from the corpus tax-free at the age of 60 or older. However, the remaining 40% can be used to obtain an annuity plan to earn monthly pension payments. The important thing to know here is that the remaining 40% used to purchase the annuity contract is completely tax free. However, depending on the income tax blocks applicable to the receipt, pension income earned from the annuity plan is taxable.

How to open an NPS account?

You need to open an NPS account with entities known as Point of Presence (POP). Both public and private sector banks are registered as POPs. And the authorized branches of a POP, which are called Point of Presence Service Providers (POP-SP), act as collection points, and an NPS account can be opened there.

To do so online, you can also visit the Pension Fund Development and Regulatory Authority (PFRDA) website which is: https://www.npscra.nsdl.co.in/pop-sp.php

What is the minimum contribution in NPS?

The minimum contribution required in an NPS account is ₹ 6,000 in a Level I account in a financial year.

In case you do not contribute the minimum amount, your account will be frozen. and you have to pay a fine of ₹ 100 to unfreeze it.

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