The Central Government and the Pension Fund Regulatory and Development Authority (PFRDA) are in charge of the National Pension Scheme (NPS) in India, a voluntary long-term investment plan for retirement. Previously, only Central Government personnel were covered by the NPS programme. However, the PFRDA has now voluntarily opened it to all Indian nationals. Except for members of the military services, employees from the public, private, and even unorganised sectors are eligible for this pension programme. NPS is a cost-effective, flexible, and conveniently accessible retirement savings account. The person makes contributions to his retirement account through the NPS. NPS is set up on a defined contribution basis, meaning that each subscriber makes his own contributions. The benefits that subscribers finally receive are determined by the contributions made, the returns earned, and the length of the contributions.
The programme encourages participants to make periodic contributions to a pension account while they are still employed. The subscribers can withdraw a specified amount of the corpus after retirement. After retirement, as a holder of an NPS account, you would get the leftover sum as a monthly pension. For anyone who works in the private sector and needs a consistent pension after retirement, the NPS system is of great importance. The programme has tax advantages under Sections 80C and 80CCD and is transferable between jobs and locations.
Features &Benefits of NPS
· Returns & Interest: A portion of the NPS is invested in stocks. However, compared to other conventional tax-saving investments like the PPF, it provides returns that are far higher. This programme has been in place for more than ten years and has thus far produced annualised returns of 8% to 10%. If you are unhappy with the performance of the fund, NPS also gives you the option of switching fund managers.
· Early withdrawals and exit regulations: It is required to make investments in NPS up to the age of 60 as a pension plan. However, after three years from the account's opening date, partial withdrawals are permitted. The maximum percentage that subscribers may remove from their contributions is 25%. Premature withdrawal is only permitted in certain situations, such as when paying for a child's education or wedding, buying a home, or in the event of a medical emergency. In the course of the tenure, subscribers may withdraw money up to three times at intervals of five years. Only the Tier I account is subject to these regulations the Tier II accounts are not.
· Rules for Withdrawals After 60: The entire corpus of the NPS system cannot be withdrawn at retirement. In order to obtain a regular annuity from the PFRDA-registered insurance company, at least 40% of the collected fund must be set aside as required under this scheme. The remaining 60% is currently tax-free. According to the government's most recent update, the entire NPS withdrawal corpus is tax-exempt.
· Rules for Equity Allocation: Investments are made into different schemes in NPS. According to the equity allocation guideline, investors may invest up to 50% of their money in stocks. Active choice and auto choice are the two investment alternatives that are accessible. In contrast to auto choice, which makes investments based on the risk profile and age of the investors, active choice gives investors the freedom to select their funds and divide their investments according to their risk tolerance and suitability.
· Offers Flexibility: The NPS plan allows subscribers to make contributions at any time during a year and to alter the amount they wish to invest each year. NPS allows flexibility because members can pick their own investment and pension fund options through which their money grows.
Tax Benefits of the NPS
Under section 80C of the Income Tax Act, the National Pension System permits tax exemption on contributions paid to the plan up to a maximum of Rs. 1.5 lakh. Additionally, both the employer and employee contributions made under the NPS programme are eligible for a tax exemption.
80CCD(1)- This is a self-contribution component of Section 80C. Under this clause, a tax exemption claim may be made for a maximum deduction of 10% of the salary. This cap is set at 20% of self-employed taxpayers' gross income.
80CCD(2)- The contribution provided by the employers to the NPS programme is covered in section 80CCD(2). Taxpayers who are self-employed are not eligible for this benefit. The lowest of the following amounts is the highest amount eligible for a tax exemption:
(i) Employer's actual NPS contribution
(ii) 10% of Basic + DA
(iii) Gross Total Income
Under section 80CCD(1B), additional self-contributions can be deducted (up to Rs 50,000) as a tax benefit for NPS. This is in addition to the existing limit of Rs.1,80,000 U/S 80C therefore, it permits a total tax deduction of up to Rs 2 lakh.
Eligibility for NPS
Anyone who is an Indian citizen and is between the age of 18 and 60 can open NPS account. Even NRIs are also eligible to open NPS accounts, however they cannot open new PPF accounts or extend their current PPF accounts after becoming NRIs. Most people consider the EPS and NPS to be equal, and they believe they cannot open this account unless their employer provides them with the option. That is untrue. Anyone, including those who are self-employed, can open an NPS account. Because employer contributions are not required for account opening and maintenance, you can still open the account even if your employer has not implemented the NPS scheme.
Type & Tenure of the NPS Account
There are two types of account under the NPS Scheme i.e. Tier I and Tier II. It is required to open a Tier I account, which is the actual NPS account. The only account that qualifies for the tax advantages and tenure restrictions is this one. Withdrawals are not permitted from this account. Tier II accounts are optional and can be used to hold extra cash until they are withdrawn or moved to Tier I accounts. Withdrawal from this account is permitted.
Although the NPS account does not have a fixed tenure,
you are only permitted to open it if you are under 60 years old. However, under
the new regulations, if you wish to contribute after turning 60, you may do so
up to the age of 70 as long as you give notice of your decision in advance. If
you reach the age of 60 and decide not to extend the contribution term, you are
required to withdraw 40% of the total balance for the purpose of purchasing an
annuities from an Indian life insurance company. Before you are 70 years old,
you are permitted to withdraw the remaining 60% of the account amount. When the
account holder turns 70 years old, it must be closed. If your total corpus does
not exceed 2 lacs when you reach 60 years old, the requirement that 40% of your
corpus be used to purchase an annuity does not apply, and you are then free to
remove the entire sum outstanding in your account.