In India, the National Pension Scheme (NPS) is a voluntary retirement savings program based on defined contributions by the participants. It is designed to enable subscribers to save systematically during their working years in order to provide them with a stable income post-retirement. It was introduced by the Government of India on January 1, 2004, initially for government employees, but later extended to all citizens of India in 2009.
Understanding the Benefits of the National Pension System (NPS)
The National Pension System (NPS) is for Indian citizens aged 18-65. By contributing a portion of your salary, you can invest in the stock market and other options, potentially growing your savings. NPS allows you to choose your investment strategy based on your risk tolerance, offering higher returns with higher risk or lower returns with lower risk. Contributions offer tax benefits, lowering your taxable income. Upon retirement at age 60, you can receive a regular pension income from your savings. Note that the funds remain locked until retirement, with limited exceptions.
- Therefore, Investment of money is done in ECGA (Equity, Corporate Bonds, Government Securities and Alternative Investment).
Types of NPS Account:
Tier 1 Account
- It is the primary retirement account and comes with certain restrictions to ensure that the funds are used for retirement purposes.
Tier 2 Account
- It is a voluntary savings account with more flexibility in terms of withdrawals, but it does not have the same tax benefits as the Tier I account.
Exit Rules and Partial Withdrawals of NPS:
Exit before the age of 60
It should have been at least ten years after the account was created in order to take money out of it.
- Up to 20% of Corpus can be withdrawn in lump sum.
- The remaining amount needs to be invested in an annuity.
- If the corpus is less than or equals to Rs 100000 there is no need to invest money in annuity. The full amount can be withdrawn in a single payment.
Exit after the age of 60
- Up to 60% of Corpus can be withdrawn in lump sum.
- The remaining amount needs to be invested in an annuity.
- If the corpus is less than or equals to Rs 200000 there is no need to invest money in annuity. The full amount can be withdrawn in a single payment.
Partial withdrawals
You can withdraw certain amount and still continue to subscribe to NPS Account. However, there are a few conditions:
- Members must have been in the NPS for three years or longer.
- The withdrawal amount cannot exceed 25% of the contributions.
- Withdrawals can occur a maximum of three times during the entire tenure.
- Withdrawals are permitted only for specified reasons:
- Higher education of children
- Marriage of children
- For the purchase/construction of residential house
- For treatment of critical illness
The National Pension Scheme (NPS) is a robust retirement savings scheme that provides a secure and regulated way for individuals to save for their post-retirement life. With its attractive tax benefits, flexibility, and professional management, it is an excellent option for those looking to build a substantial retirement corpus. However, potential investors should consider the long-term nature of the scheme and the tax implications of withdrawals before investing.