National Pension Scheme (NPS)
The National Pension Scheme (NPS), available to individuals across public, private, and unorganized sectors excluding Armed Forces personnel, offers a flexible contribution structure. Subscribers can contribute a minimum of Rs.6,000 annually, payable either as a lump sum or in monthly installments of Rs.500.
Contributions to the NPS are invested in market-linked instruments, including debt and equities, with returns dependent on asset performance. Presently, the NPS interest rate ranges from 8% to 10% on contributions.
As a government-sponsored pension plan, we’ve listed some of the NPS’s key features and characteristics below:
- A component of the national pension fund is invested in stocks.
- When compared to typical tax-saving investment instruments like PPF, the returns delivered by the National Pension Scheme are significantly higher.
- The National Pension System (NPS) gives annualized returns of 9% to 12%.
- If a person is displeased with the fund’s performance, he or she can change the fund’s manager.
- Under section 80C of the Income Tax Act, a maximum deduction of Rs. 1.5 lakh can be claimed in NPS.
- Subscribers to the tier-I account must make an annual contribution of Rs.6000 and a one-time commitment of Rs500. Subscribers to the tier-II account must make an annual contribution of Rs.2000 and a one-time donation of Rs.250.
- After retirement, one cannot withdraw the complete corpus from the national pension programme.
- Only 60% of the funds in an NPS account can be withdrawn after retirement, with the remaining 40% invested in a pension scheme to ensure a regular annuity.
- An individual can create an NPS account either online or in person.
- During the entire tenure, a withdrawal can be made up to three times at 5-year intervals.
- After three years of NPS account participation, one can take up to 25% of the collected fund for a clear objective such as medical treatment, further education, marriage, home purchase, and so on.
Benefits of NPS
- Interest/Returns – A portion of the NPS contribution is invested in equities, which provides higher returns than other traditional tax-saving investment choices such as the PPF. This plan is best suited for persons who desire to accumulate savings in the long-term and live a financially stable life after retirement, with an interest rate of 9% -12%.
- NPS Tax Benefits – Individuals can also take use of this NPS benefit. Under Section 80C of the Income Tax Act, contributions to the NPS programme up to a maximum of Rs.1.5 lakhs are eligible for tax exemption. Furthermore, the employer and employee contributions to the National Pension Scheme are also eligible for tax exemption.
- Premature withdrawals & exit rules – NPS is required to be invested in as a pension programme until you reach the age of 60. Partial withdrawals are permitted after three years from the account’s opening date. Subscribers have the option to withdraw up to 25% of their entire contribution. Only in exceptional circumstances, such as funding a child’s education, acquiring a home, or in the event of a medical emergency, is premature withdrawal permitted. During the whole tenure, subscribers can withdraw up to three times at 5-year intervals. These rules only apply to Tier I accounts; they do not apply to Tier II accounts.
- After the 60 withdrawals rule – The individual cannot withdraw the whole accumulated fund from the account after retirement under the NPS plan.