It is important to start planning your retirement early on. This is where the likes of the National Pension System (NPS) come into use. The NPS is open to all employees of the public sector, the private sector and even the unorganised sector, with the exception of armed forces personnel. With the NPS scheme, the subscriber can make a minimum contribution of around Rs 6,000 in a financial year in the form of a lump-sum or monthly instalments of Rs 500. Any Indian citizen between the ages of 18 to 60 years old can open an NPS account, and once it matures at 60, it can be extended till the client’s 70th year. In the NPS Scheme, the contributions are generally invested in market-linked instruments such as debt and equity. The returns that one might see, depends on how these instruments perform.
The Benefits of NPS
1) Returns and Interest: Compared to traditional tax-saving investment options like PPF, the NPS route gives one higher returns, as it invests the contributions towards equities. It is ideal for those looking to settle down post-retirement as it accumulates an interest rate of 9 to 12 per cent, depending on the type of NPS account you choose.
2) Tax Exemptions: Under Section 80C of the Income Tax Act, any contribution made towards the NPS scheme up to the maximum of Rs 1.5 lakh is exempt from taxation. In the event that contributions into the scheme come from the employer or employee, it is also exempt from taxation.
3) Flexibility: This route is very flexible to future pensioners as it is optional, and investors can choose the type of investment they want, the pension fund amount they wish to invest and so on. It is also a fairly simple and straightforward process to open an account. It should be noted that it is mandatory to continue the investment once it is open, till the age of 60.
4) Withdrawal: Even withdrawing is a benefit. It forces you to save, while still giving you the option to withdraw in small amounts. After three years of opening an account, you can withdraw around 25 per cent of the total contribution. The rest sits in your account, accumulating interest. Premature withdrawal can be done in the event of an emergency.
5) Security and Reliability: The NPS Scheme is regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). Due to the regularity with which one needs to invest, the oversight is also regular and helps keeps things transparent, making the entire process secure.
Different Types of NPS
There are generally two types of NPS offers or accounts that one can consider – Tier 1 and Tier 2 accounts.
Tier 1 Account
This type of NPS is a basic pension account with certain limits on the withdrawal. Before the age of 60, you can only withdraw 25 per cent of your pension. The other 75 per cent goes towards buying the annuity from the life insurer, which is essentially a series of payments made over a certain time. Annuity directs the insurer to pay the insured income till the plan matures i.e. when you hit 60 or till death. After reaching 60 years of age, almost 60 per cent can be withdrawn and 40 per cent needs to be parked in the annuity.
Tier 2 Account
This is the inverse of the tier 1 account. In this option, the pensioner can withdraw without limit and it is a voluntary savings option.