What is National Pension System (NPS), Benefits of NPS, Eligibility, NPS Calculator, Disadvantages & NPS Tax Benefits
What is
National pension Scheme (NPS)
The National Pension Scheme (NPS) is a government-sponsored retirement savings program in India. It was launched way back in 2004 with the aim of providing retirement income to all citizens of India encouraging the social security provisions.
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India.
Under NPS, individual savings are put in to a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in to the diversified portfolios comprising of Government Bonds, Bills, Corporate Debentures and Shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.
At the time of normal exit from NPS, the subscribers may use the
accumulated pension wealth under the scheme to purchase a life annuity from a
PFRDA empanelled Life Insurance Company apart from withdrawing a part of the
accumulated pension wealth as lump-sum, if they choose so.
·
Flexible- NPS offers a range of investment options and choice of Pension
Funds (PFs) for planning the growth of the investments in a reasonable manner
and monitor the growth of the pension corpus. Subscribers can switch over from
one investment option to another or from one fund manager to another.
·
Simple – Opening an account with NPS provides a Permanent Retirement
Account Number (PRAN), which is a unique number and it remains with the
subscriber throughout his lifetime. The scheme is structured into two tiers:
o Tier-I
account: This is the non-withdrawable permanent retirement account
into which the regular contributions made by the subscriber are credited and
invested as per the portfolio/fund manager chosen of the subscriber.
o Tier-II
account: This is a voluntary withdrawable account which is allowed
only when there is an active Tier I account in the name of the subscriber. The
withdrawals are permitted from this account as per the needs of the subscriber
as and when required.
· Portable- NPS provides seamless portability across jobs and across
locations. It would provide hassle-free arrangement for the individual subscribers
while he/she shifts to the new job/location, without leaving behind the corpus
build, as happens in many pension schemes in India.
· Well Regulated- NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust. The account maintenance costs under NPS are the lowest as compared to similar pension products across the globe. While saving for a long-term goal such as retirement, the cost matters a lot as the charges can shave off a significant amount from the corpus over 35-40 years of investment period.
· Dual benefit of Low Cost and Power of compounding: Till the retirement, pension wealth accumulation grows over the period of time with a compounding effect. The account maintenance charges being low, the benefit of accumulated pension wealth to the subscriber eventually become large.
·
Ease of Access: The NPS account is manageable online. An NPS account can
be opened through the eNPS portal. Further contributions can be also be made online
through the following eNPS portals of CRAs: NSDL CRA, Kfintech CRA,
CAMS CRA. Central Recordkeeping Agency (CRA) is
required to establish an internal system that delivers compliance with
standards for internal organization and operational conduct, with the aim of
protecting the interests of NPS subscribers and their assets.
· All Citizen Model
· A citizen of India, whether resident or non-resident, subject to the following conditions:
· Applicant should be between 18 – 60 years of age as on the date of submission of his/her application to the Point of Presence (POP)/ POP Service Providers (POP-SP).
· Applicant should comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form. All the documents required for KYC compliance need to be mandatorily submitted
What is NPS Calculator?
The National Pension Scheme Calculator helps
an investor estimate the wealth gained and maturity amount of the whole
investment, i.e., how much they will receive as a pension when they retire at
age 60 and the monthly
pension.
Features of NPS Calculator
Here are some of the salient features of the
National Pension Scheme Calculator.
·
NPS calculator can be used online
in a very easy and simple way.
·
NPS plan calculator helps
calculate the amount of pension you will receive.
· NPS calculator also shows the
amount invested by you during the accumulation phase, NPS
interest rates, returns earned, and the total
amount of funds generated at maturity.
· The NPS calculator makes the
computation of maturity amount simpler.
· The investors of NPS scheme can
check the tax exemptions available under Section 80C of
the IT Act, 1961.
Disadvantages or Cons of the NPS
The NPS scheme has its own set of cons or disadvantages
when we compare it to the other investment/pension options available.
1. Withdrawal
Limits
Along with the NPS lock-in period,
withdrawals from the pension account also have restrictions. NPS restricts all
kinds of withdrawals before the subscriber reaches the age of 60 years. The
subscriber can make the first withdrawal from NPS after 10 years of opening the
account, and a total of 3 withdrawals, till they reach the age of 60 years. The
withdrawal cannot be more than the total sum of all the contributions made by
the subscriber.
2.
Taxation at
the Time of Withdrawal
The NPS corpus, which the subscriber can use
for buying an annuity or for drawing pensions, is taxable when the schemes
mature. 60% of the investment in the NPS is taxed by the Government of India,
while 40% escapes taxation.
3. Account
Opening Restrictions
A person can maintain a single NPS account
through an NPS CRA login in their lifetime. While the PRAN can be easily ported
across geography and jobs, 1 single individual will get a single PRAN.
4. Limited
Exposure to Equities
The investment limit on equities has been
confined to 75%. This may be a significant issue for individuals in their
20's-30's. This implies a possible loss of opportunity to get exposure to the
equity markets.
5. Mandatory
Annuity
The withdrawal from Tier 1 account is
restricted as it is the primary account for pension savings. At the time of
maturity, one can withdraw 60% of the funds, and the remaining are used to buy
an annuity. The returns of annuity are not tax exempted.
6. NPS Lock-in
Period
Since NPS is a retirement product, the NPS
lock-in period is till retirement.
7.
Complexity
towards Choosing the Best NPS Fund Manager
Many people are not aware of the financial
terms relating to equities, debt, securities, and others. Hence, they fail to
choose the best NPS fund manager for their NPS investments.
Factors Impacting Monthly NPS Pension Amount
Traditional
pension schemes such as Government pension or EPS pension had pre-defined
contribution amounts and a specific formula to calculate the monthly pension
post-retirement. The monthly pension from National Pension System is different
because the amount accumulated in the pension account varies from one
subscriber to another due to some key reasons:
·
NPS
Contributions
You can choose the amount you
want to invest in your NPS account subject to a minimum annual contribution of
Rs. 500. There is no maximum limit on the amount that you can invest, so, you
have the opportunity to accumulate a significantly larger amount by the time
you retire as compared to traditional pension schemes where there is a maximum
limit on the pension contribution that can be made. As a result, your monthly
pension from NPS can be significantly higher as compared to the monthly pension
received from traditional pension schemes.
·
Age
& service left at the time of Entry
The returns will depend on the factor when one starts investment and how long one is invested into the NPS.
The Returns from NPS will depend on the asset classes you are invested in. Under NPS, your contributions are invested in 4 different asset classes – Equity, Government Securities, Corporate Bonds, and Alternative Investment Funds. What’s more, you can also select the allocation limits towards each asset class according to your risk tolerance.
Income Tax Benefits available in NPS?
1. Benefits To Individuals:
Any individual who is Subscriber
of NPS can claim tax benefit under Sec 80 CCD (1) with in the overall ceiling
of Rs. 1.5 lac under Sec 80 CCE.
Exclusive Tax Benefit to all NPS Subscribers
u/s 80CCD (1B)
An additional deduction for
investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to
NPS subscribers under subsection 80CCD (1B). This is over and above the
deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.
2. Benefits under the Corporate Sector:
Corporate Subscriber:
Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s
80CCD (2) of Income Tax Act. Employer's NPS contribution (for the benefit of
employee) up to 10% of salary (Basic + DA), is deductible from taxable income,
up-to 7.5 Lakh.
Corporates
Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be
deducted as ‘Business Expense’ from their Profit & Loss Account.
For more details and nps login
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