Planning for retirement is an essential aspect of financial planning, and a growing number of investors today are realising the significance of making early investments to boost their retirement corpus. The National Pension Scheme is steadily gaining popularity among investors to meet their retirement needs.
However, many investors still do not fully understand what an NPS is and what are the NPS benefits in retirement planning and are unsure if they should subscribe to an NPS. If you, too, are contemplating subscribing to NPS, then this simple guide will help you get an understanding of the NPS.
What is NPS?
National Pension System (NPS) is a defined contribution pension-cum-investment scheme sponsored by the government. NPS was launched in the year 2004 in January exclusively for government employees except for those in the armed forces, but later on, in 2009 became opened to all to encourage systematic investment savings among citizens so that they can have a regular income at old age.
National Pension System is a voluntary investment option that is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is one of the cheapest market-linked retirement plans with a minimum contribution of Rs 6000 per annum. The investment can either be made as a lump sum or through minimum instalments of Rs 500 each month.
Features of the National Pension System
- NPS is portable across locations. So, it can be opened and operated from anywhere in India
- It is open to all Indian citizens, and the minimum entry age is 18 years, and the maximum age is 65 years.
- NPS account can be opened offline at any Point of Presence (POP) center with your KYC documents or online at enps.nsdl.com by linking your PAN card and Aadhaar number to your account
- In NPS, the savings of the investors are pooled together and invested in PFRDA-regulated funds managed by professional fund managers in various diversified portfolios. Investors can choose an asset mix of government bonds, equity instruments, corporate bonds, and alternative investments depending on their risk appetite.
- There are two phases in NPS-
1. NPS Accumulation Phase: This phase, you invest periodically during your working years to build the retirement corpus in a mix of asset classes depending on your risk appetite.
2. Retirement or NPS Annuity (Pension) Phase: This phase part of your corpus is used to provide you with a pension after your retirement in the form of annuity - Investments in NPS can be managed in two ways-
1. Active choice- If you want to manage your funds actively
2. Auto choice- If you feel you lack the knowledge and expertise and allow a life-cycle based approach for fund management. - NPS offers tax benefits to investors at the time of making contributions and even at maturity.
How does National Pension System work?
Once you open your NPS account, you are provided with a unique Permanent Retirement Account Number (PRAN), which remains valid throughout your lifetime. There are 2 tiers in the structuring of NPS.
Tier-I account- It is a permanent account. Thus, the accumulations made in this account are deposited and then invested according to the desired asset allocation as per the portfolio chosen by you. Withdrawals from NPS are not permitted. A total deduction of up to Rs. 2 lakhs can be claimed by investing in NPS under section 80C and 80CCD.
Tier-II account- It is a voluntary account, but you need to have an active Tier I account. You can make withdrawals from this account as and when you need it to meet any expenses.
NPS benefits:
1. NPS is a low-cost plan
NPS has an initial registration cost of Rs 200 and another Rs 40 to be paid for opening the account. Apart from this, you pay an annual account maintenance cost, which ranges from Rs 60 to Rs 95, and the value of each transaction is Rs 3.75. There is a nominal Pension Fund Manager (PFM) charge of 0.01% of the total AUM and custodian charges of 0.0032%.
2. NPS investments are managed by professional fund managers
One of the most significant NPS benefits is that it is managed by professional fund managers who have adequate knowledge and market expertise about markets and money management.
3. NPS is a highly regulated
NPS is regulated by the PFRDA (Pension Fund Regulatory and Development Authority) and all the investments are regularly monitored and reviewed by NPS trust.
4. Keeps the retirement corpus intact as it is difficult to exit
Even though NPS is a voluntary investment, the structure of NPS does not allow you to withdraw your corpus till you attain the age of 60. As the lock-in period is very rigid for the scheme, your retirement corpus is intact to meet your post-retirement requirements.
5. NPS tax savings for taxpayers is very useful in lowering their tax liability and enhancing returns
NPS tax savings make it very lucrative for the accumulation of retirement corpus. NPS entitles you to tax benefits at the time of investing, on the gains made during the tenure of your investment, and also at the time of withdrawal. In short, NPS offers EEE tax benefits. You can claim up to Rs 1.5 lakh in a financial year under Section 80C. Moreover, an additional deduction of Rs 50,000 can be claimed under Section 80CCD(1B).
CONCLUSION
The National Pension System is an ideal investment choice for your retirement planning as it will help you to make systematic investments and provide you with the desired income post-retirement. Get in touch with our experts at IndiaNivesh for more guidance and assistance for your NPS investments.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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