National Pension Scheme (NPS) is a voluntary, defined contribution retirement benefits scheme designed by the Government of India to ensure all subscribers have a regular income post-retirement through systematic savings throughout their working life. The governing body for NPS is Pension Fund Regulatory and Development Authority. NPS is designed to inculcate a habit of saving for retirement amongst the citizens of the nation.

Here are some significant salient features of NPS for your in-depth understanding.

NPS Rate of Return

The expected return rate in an NPS investment largely depends on the fund’s market performance. The earlier you invest in NPS. The higher the chances of obtaining a higher retirement corpus. As an informed subscriber, you must know that the expected NPS rate of return is the interest earned on the contributions made to the account.

National Pension Scheme has been in effect for about a decade. In these years, it has yielded an annualized return ranging between 9 to 12 per cent. Hence this is a highly lucrative option for investors who wish to secure their finances for the future. The applicable interest rate is based on the asset class chosen and the contribution amount. Another advantage of investing in NPS is that wealth accumulation grows over a period of time with a compounding effect.

Flexibility of NPS Investment

NPS comes with a lot of flexibility. It gives you the flexibility to change your fund manager, investment pattern, and POP (Point of Presence). As an investor, you can choose the control you want to exercise over your NPS Investment. You can actively choose the asset classes you want to invest in based on the NPS account performance. Some such asset classes include Corporate Bonds, Equity, Government Securities, and Alternate Assets. Monitoring and Management of the NPS Investment is hassle-free.

Economical Investment

NPS Investment is a government-designed low-cost investment scheme. Subscribers can invest in NPS Scheme with an amount as low as Rs.1000 per month. The fund management charges for NPS is also lower when compared to other investments.

Partial Withdrawal Option

NPS gives its subscriber a partial withdrawal option. This means investors of NPS Investment have the option to withdraw their contributions to NPS account partially. As per the regulatory norms concerning the partial withdrawal option, an investor is allowed to withdraw their NPS Tier I scheme up to a maximum limit of 25 per cent, subject to the following terms of withdrawal.

• Contributions must have been made for at least a period of 10 years for the partial withdrawal facility to apply.
• There must be at least a gap of 5 years between two consecutive partial withdrawals.

The partial withdrawal option allows the subscribers to meet their financial contingencies before retirement, should they face any emergencies.

Superannuation Fund Transfer

Subscribers to NPS have the option to transfer their superannuation funds to their NPS account without any tax impact. However, superannuation fund transfer without any tax implication is only permitted post the approval of the relevant authorities.

Portable Investment

Unlike many pension schemes in India, NPS offers its subscribers seamless portability across different locations and jobs. This means all NPS subscribers have the facility to shift to a new job or location without worrying about leaving behind the corpus they have built over the years. NPS account arrangement and access is simple and user-friendly.

Regulations

All NPS investments are regulated by the Pension Fund Regulatory and Development Authority under the Ministry of Finance, Government of India (PFRDA). The PFRDA regulates adherence to all NPS-related guidelines through regular, transparent and stringent monitoring.

Types of NPS Accounts

There are essentially two types of NPS Accounts. They are Tier I Accounts and Tier II Accounts. Here are the basic characteristic differences between the two.

Tier I Account: The Tier I Account is a mandatory non-withdrawable pension scheme. This NPS account requires the subscriber to make regular contributions that are invested as per the portfolio chosen for the subscriber. Tier I Account is not a liquid NPS account.

Tier II Account: The Tier II Account is a voluntary withdrawable saving account. A subscriber is allowed to hold a Tier II account only when the subscriber has an active Tier I account. A subscriber can withdraw from a Tier II account as per the financial requirement of the subscriber and the terms of withdrawal associated with a Tier II NPS account. Tier II account is a highly liquid account.

Now that you know the features of NPS in details, let us tell you about the NPS Tax Benefits.

NPS investment is a very tax-efficient retirement scheme. Here is how.

NPS Tax Benefits for Salaried Individuals

• Under section 80CCD (1B) of the Income Tax Act, salaried individuals can claim a tax exemption up to an amount of Rs. 50,000. This tax exemption is over and above the limit of Rs. 1,50,000 under section 80C of the Income Tax Act.
• All salaried individuals subscribing to NPS can invest up to 10 per cent of their basic salary +dearness allowance and claim tax exemption on the amount invested under section 80 CCD (1) of the Income Tax Act Act, The limit of the tax exemption is Rs. 1,50,000 under section 80C of the Income Tax Act.

NPS Tax Benefits for Self-Employed Individuals:

• Under section 80CCD (1B) of the Income Tax Act, self-employed individuals can claim a tax exemption up to an amount of Rs. 50,000. This tax exemption is over and above the limit of Rs. 1,50,000 under section 80C of the Income Tax Act.
• All self-employed individuals subscribing to NPS can invest up to 20 per cent of their basic salary +dearness allowance and claim tax exemption on the amount invested under section 80 CCD (1) of the Income Tax Act, the limit of the tax exemption is Rs. 1,50,000 under section 80C of the Income Tax Act.

To know more about NPS Investment, such as how to open an NPS account and who is eligible to invest in NPS, you can Connect With Us. Team Eureka is always happy to assist you with all your financial asset management needs.