National Pension Scheme
What is the National Pension Scheme?
This is a scheme that is social security to the scheme holders after retirement. NPS has been made available to all citizens of India from 1st May 2009 except for Armed Forces. A unique Permanent Retirement Account Number (PRAN) will be issued to every account holder.
It is a contribution-based pension fund that is used to create a retirement corpus.
National Pension System (NPS), Regulated by PFRDA, is an important milestone in the development of a sustainable and efficient voluntary defined contribution pension system in India.
Benefits of NPS
Voluntary The subscriber can contribute at any point during the Financial Year and with any amount.
Flexible Subscribers can choose their own investment choice and fund manager.
Low Cost The cost of investment in NPS is much lower than Mutual Funds.
Tax Benefits There is an additional deduction of Rs. 50,000/- u/s 80CCD(1B).
Investment Choices in NPS
There are 2 investment choices in NPS: –
- Active Choice
- Auto Choice
Under Active Choice, NPS offers the subscriber to design the portfolio depending on his own risk appetite.
Whereas, under Auto Choice, the money will be invested on the basis of the subscriber’s age. As the age increases the exposure to equity decreases.
Accounts under NPS
There are 2 types of accounts under NPS: –
- Tier I NPS Account – It is a mandatory account if you want to avail benefits of NPS. It can be opened with a minimum investment of Rs. 500/- and thereafter one can invest Rs. 1,000/- or more every year.
Upon reaching the age of 60, one can withdraw 60% of the amount as a corpus and the remaining 40% will be used to buy an annuity to provide regular pensions.
- Tier II NPS Account – It is a voluntary account which can be opened if you are having a Tier I Account. It can be opened with a minimum investment of Rs. 1,000/- and there is no minimum limit to invest on a yearly basis.
One can withdraw the amount at any point in time just like a savings account.
Annuity Schemes under NPS
Following are the Annuity schemes under NPS: –
- Annuity for Life – On the death of the annuitant, payment of annuity ceases.
- Annuity for life with return of purchase price on death – On the death of the annuitant, payment of Annuity ceases and the purchase price is returned to the nominee.
- Annuity payable for life with 100% Annuity payable to spouse on the death of annuitant – Annuity is paid to the spouse during the lifetime if the annuitant ceases. If the spouse ceases before the annuitant then the annuity will cease after the death of the annuitant.
- Annuity payable for life with 100% Annuity payable to spouse on the death of annuitant with return on the purchase of Annuity: – One the death of the annuitant, an annuity is paid to the spouse during lifetime, and purchase price is paid after the death of the spouse.
- The amount invested will be allowed an additional deduction of Rs. 50,000/- u/s 80CCD(1B) over and above 1.5 Lacs u/s 80CCE.
- The accumulated amount can be withdrawn up to 60% at the age of 60 which is also tax-free.
- The remaining 40% will be used to buy annuity and tax will be levied as per the respective slab rates.
- There are no tax benefits if you invest under Tier II Accounts.