For any working professional today, retirement planning is an integral aspect to ensure financial well-being, and with increasing life expectancy, it has become more crucial than ever to ensure a stable source of income post-retirement. The National Pension System (NPS), launched by the Government of India, is exactly what you need. One of the most effective tools for long-term retirement planning, it has been designed to encourage a practice of systematic savings among citizens.
NPS offers a secure, controlled and a flexible method to build a retirement pool while also providing tax benefits to the salaried or self-employed class. This scheme was initially introduced in 2004 for government employees but was later extended to all Indian citizens in 2009 with an offering to make voluntary monetary contributions in this retirement-focused savings scheme. The primary aim of this government initiative is to provide retirement benefits to Indian citizens, as it seeks to inculcate a habit of saving money for any planned and unplanned future activities. The NPS is regulated and administered by the PFRDA (Pension Fund Regulatory and Development Authority), under the PFRDA Act 2013. This contribution scheme is market-linked and managed by a group of professional fund managers. Any contribution made by individual subscribers into this scheme is accumulated until retirement, and the corpus continues to grow via market-linked returns. Subscribers have an option to exit this plan before retirement if necessary or opt for the superannuation (the amount paid as pension to a retired employee).
Eligibility Criterion:
- The individual who wishes to open a NPS account must be an Indian citizen, whether resident or non-resident.
- He/She must be aged between 18 to 70 years on the date of submission of the application.
- It is applicable for government employees at central and state level, except for those employed with the armed forces.
- Corporate employees can also have an account, as per the norms laid by the employer.
- The KYC (Know Your Customer) requirements must be fulfilled as required in the subscriber form and all necessary documents must be in place.
- This is an individual account only, Hindu Undivided Families and Persons of Indian Origin are not eligible for NPS.
Once the account is successfully opened and confirmed by the eNPS website, the individual is issued a PRAN or Permanent Retirement Account Number. This is a unique 12-digit number linked to each individual’s NPS account. It is issued upon the completion of the registration process and remains with the subscriber throughout their retirement journey. This permanent number serves as the unique identifier to access the account details and make contributions, which is shared with the investor for his or her reference.
Account Structure:
NPS offers two different types of accounts:
- Tier I Account: This is a mandatory-type, primary pension account for all subscribers with restrictions on withdrawal, so that a sufficient balance is built over time.
- Tier II Account: This is a voluntary savings account with no withdrawal restrictions. Since it offers more liquidity, the tax benefits are not the same as in the Tier 1 account.
Major Benefits of NPS:
- There’s no maximum limit on the deposit amount each year and there are no caps on how much you can invest.
- There’s a minimum annual contribution of INR 1,000 to be made for Tier 1 accounts. For Tier 2 accounts, there’s no minimum requirement as such.
- Contributions are tax deductible under Section 80CCD (1) and 80CCD (1B) of the Income Tax Act, up to a maximum of INR 2 lakhs annually.
- NPS is one of the lowest-cost pension products in the world. The fund management charges are significantly lower compared to mutual funds or insurance-based investment products.
- The contributions are managed by PFRDA-registered Pension Fund Managers (PFMs), who are highly professional and well-educated managers. They make investments on your behalf and review the performance on a regular basis.
- The big advantage is that NPS accounts are portable across jobs and locations. Whether you change your employer or city, the account remains unchanged.
- The account details can be monitored, tracked and reviewed through a complete transparent and accountable process in place, since it is a government-backed investment platform.
- There is ample flexibility, as individuals can decide how much they want to contribute and how frequently as per your individual income levels and retirement goal.
Investment Options:
a) Auto Choice: This option works as a default choice for subscribers. The system adjusts the asset allocation automatically as per the age profile of the subscriber.
b) Active Choice: Under this option, individuals are free to decide which one to opt for, among the available asset classes for investment. They can allocate different percentages of contributed funds to be invested in.
There are four major asset classes available as investment options:
- Asset Class E – Equities
- Asset Class C – Corporate Debt Securities
- Asset Class G – Government Securities
- Asset Class A – Alternative Investment Fund
Partial Withdrawal Option:
One of the key features offered in this National Pension Scheme is the partial withdrawal facility, to access the funds saved over the years and meet any unforeseen financial needs before retirement itself. The rule is that any subscriber can make a withdrawal of their Tier I scheme contribution up to a maximum limit of 25% only. The additional clause however is,
- Contributions up to a minimum of 10 years must be made for the partial withdrawal facility to apply.
- There should be a minimum gap of 5 years between two consecutive withdrawals
The National Pension System stands out as a well-thought and structured retirement planning tool. The wide range of benefits and features offered under this scheme makes it an attractive option for those looking to build a secure financial future for themselves. With growing expenditure and rising costs, achieving financial independence to have a safe future has become paramount. NPS plays a crucial role in nurturing a robust retirement model in India. Whether you are a salaried employee, a self-employed professional, or a business owner, incorporating NPS into your financial plan can offer long-term peace of mind. You can access the eNPS – National Pension System site for complete information on this scheme.
Think ahead, plan your retirement and start your savings journey today!