NPS: A step closer towards your dream retirement
- December 8, 2021
- Posted by: MvM Team
- Category: Retirement Planning
The foundation of a good retirement is planning. An individual who doesn’t plan for retirement efficiently might end up working even at the age of retirement. To address this concern and make dream retirement achievable, the Government of India came up with a beneficial retirement planning product called National Pension Scheme (NPS).
What is National Pension Scheme?
NPS is a retirement plan product. It is a systematic financial investment scheme wherein an Indian citizen or NRI aged 18-60 is supposed to regularly contribute some proportion of his monthly salary during his/her working life.
At the time of retirement, a certain fraction (up to 60%) of the saved funds/ corpus can be withdrawn in a lump sum. The rest of the money will be annuitized: i.e., distributed as a monthly pension post-retirement.
It consists of two plans,
- Tier 1 – Pension plan
- Tier 2 – Investment plan
The funds of NPS holders get invested in various securities like equity and debt instruments by Pension Fund Managers, and the holders enjoy market-linked returns over their accumulated funds after retirement.
Who can join?
Any person residing in India or Non-resident Indian (NRI) falling between the age of 18 and 70 as of the date of submission of application is allowed to open an NPS Account. In case of any change in the citizenship status of an NRI, the account gets suspended.
However, overseas citizen of India (OCI), Person of Indian Origin (PIO), and HUFs are not permitted to open an NPS account.
Exit before retirement
Midway exit or termination of the superannuation fund will lead the subscriber entitled to receive 40% of the total contributions made till the time as a monthly pension through the purchase of an annuity. The rest of the money, i.e., 60%, can be withdrawn in a lump sum.
Early Withdrawals
- A subscriber must have been investing for at least three years to be entitled to early-withdrawals.
- Can withdraw up to 25% of Employee contribution for specific purposes like education, medical, purchasing a house, wedding, and some more essential basis.
- This withdrawal can be up to 3 times, with a gap of at least five years maintained between any two, in the entire life of the NPS account.
- Closure of NPS before Retirement: 20% of the corpus can be withdrawn (Tax Free) and remaining 80% will have to be utilized for purchase of annuity.
- Death Benefit: Full withdrawal (Tax Free) by the nominee is allowed. However, if annuitized by nominee, the pension income would be taxed as per nominee’s income tax slab.
Types of NPS Accounts
- Individual NPS account– In this account, the funds are contributed by the subscriber-only. All the investment choices and selection of fund managers are done by the account holder alone. There is no involvement of any corporate or government body. The subscriber runs his whole accounts in his capacity. Generally, this account is open by persons constituting the All-Citizens Model.
- Corporate NPS account– In this account, the funds get contributed by both employee (the account holder) and the employer. Herein, the corporate, whether private or government, opens its employees’ NPS account and can contribute up to 10% of the employee’s salary (Basic + DA). Tax benefits are available over the contribution made by the employer. Hence, as a result, a good corpus is made to live a good-quality life after retirement.
Tiers of NPS Account:
There are two divisions or types of accounts in the NPS account set up for a subscriber under Permanent Retirement Account Number (PRAN). These are known as tiers:
Basis | Tier I | Tier II |
Account opening | It is a mandatory account. It means if a person wants to invest in the NPS account, then he must open a Tier I account. | It is not mandatory to open this account. The holder is allowed to invest in this account after completing all the dues of the Tier I account. |
Status | It is the first account required to open to start retirement planning investing in NPS. Tier I account is a pure retirement planning product and is also known as the pension plan. | It is a voluntary account. The subscriber is not bound to open a Tier II account But it is compulsory to have a Tier I account to open a Tier II account. It is like a savings and investment account. |
Minimum contribution | The minimum amount required to open an NPS account is Rs.500. However, the holder is required to invest a minimum of Rs.1000 per annum to keep the account active. | The minimum investment required is Rs.250. The account is flexible, as you can make investments of any amount anytime without any compulsion. |
Withdrawals | Withdrawals from this account are not allowed until the maturity of the scheme. However, under certain conditions like medical expenses, unemployment for 60 consecutive days, etc., withdrawals can be made. | Anytime withdrawals are permitted, i.e., the subscriber can withdraw his entire corpus from this account whenever he/she wishes. |
Tax benefits | This account enjoys the tax benefits on an annual basis. | No tax benefits get availed on this account. It is fully taxable. |
Points to remember –
- Different allocations are allowed for both tiers.
- For an employer, investing in the NPS account of its employee is a voluntary option, but the Central Government has to contribute 10% of the basic salary of a government employee.
- At the maturity of the Tier, I account, the holder can withdraw 60% in a lump sum, and the rest 40% is annuitized.
