What is NPS | NPS | National Pension Scheme | SIP

The National Pension Scheme (NPS) is a government-backed retirement savings scheme introduced by the Government of India to help citizens prepare financially for their post-retirement life. Launched in 2004, NPS aims to provide financial security to individuals during their retirement years by encouraging them to save and invest regularly throughout their working life. The scheme has gained immense popularity due to its low-cost structure, flexibility, and tax benefits. Here, we’ll explore the features of NPS, its benefits, eligibility, and how you can make profit out of this.

Table of Contents

What is NPS (National Pension Scheme)?

NPS is a voluntary, long-term investment plan aimed at providing a steady source of income after retirement.

It allows individuals to contribute a portion of their income to a pension fund, which is then invested in a combination of equity, government bonds, and other securities. The scheme provides two types of accounts:

Tier I Account: This is the primary NPS account where the contributions made are locked until retirement. Withdrawals are restricted, and the amount in this account is used to build a pension corpus.
Tier II Account: This is a voluntary account, and contributions can be withdrawn at any time. However, the tax benefits are only available for the Tier I account.

How Does NPS Work?

NPS works by pooling the contributions made by individuals and investing them in a mix of equity, corporate bonds, government securities, and alternative assets, as per the risk preferences of the investor. The pension corpus grows over time based on the returns generated from these investments. Upon retirement, the accumulated corpus is used to provide a monthly pension to the individual.

Here’s how it works in simple terms:

You open an NPS account (Tier I and/or Tier II).
Contribute a fixed amount regularly to your NPS account.
Your contributions are invested in various financial instruments, based on your selected risk preference (Equity, Government Bonds, etc.).
Over time, your NPS account grows, and you build a retirement corpus.
Upon retirement, you can withdraw up to 60% of the corpus as a lump sum, while the remaining 40% must be used to purchase an annuity for a regular income stream.

Read: What is SIP

Key Features of the National Pension Scheme

Flexible Investment Options: NPS offers two types of investment strategies: Active and Auto. In Active, you choose the asset allocation, while in Auto, the allocation is made automatically based on your age and risk profile.
Tax Benefits: NPS offers significant tax advantages:
- Section 80C: Contributions to NPS are eligible for a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act.
- Additional Tax Benefit: NPS contributions are eligible for an additional tax deduction of up to ₹50,000 under Section 80CCD(1B), making it an attractive option for tax planning.
Low-Cost Structure: NPS is known for its low management fees compared to other investment options like mutual funds. The cost-effectiveness of the scheme makes it an attractive retirement option.
Transparency: NPS provides complete transparency in the form of regular updates on the performance of your investments, including the returns on your corpus and asset allocation.
Portability: One of the biggest advantages of NPS is its portability. If you change jobs or move to another city, your NPS account remains active, and you can continue contributing to it without any interruptions.

Eligibility for NPS

NPS is open to all Indian citizens, whether they are salaried individuals, self-employed professionals, or even pensioners. The following are the basic eligibility criteria:

Age: You can open an NPS account between the ages of 18 and 65 years.
Nationality: Only Indian citizens (including NRIs) are eligible to invest in NPS.

Benefits of Investing in NPS

Long-Term Retirement Planning: NPS is designed for long-term retirement planning, helping individuals build a substantial pension corpus over time.
Attractive Returns: Historically, NPS has delivered returns that outperform traditional investment avenues like fixed deposits or public provident funds (PPF), thanks to its exposure to equity markets and other high-return instruments.
Regular Income in Retirement: NPS ensures a steady monthly income post-retirement through the annuity option, providing financial stability during your retirement years.
Government Backing: As a government-backed scheme, NPS offers a high degree of security. The fund managers are regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which ensures transparency and accountability.
Lower Risk with Asset Allocation: Depending on your risk tolerance, you can choose a mix of equity, government bonds, and other asset classes. The automatic asset allocation feature (Auto Choice) is particularly beneficial for risk-averse investors.

How to Open an NPS Account?

Opening an NPS account is a simple process. You can choose between two options:

Offline Method: Visit any Point of Presence (PoP) such as banks or financial institutions that offer NPS services. You’ll need to fill out the form and submit documents such as KYC proof, PAN card, and bank details.
Online Method: You can open an NPS account online through the eNPS portal. The process is user-friendly, and you’ll need to complete the KYC verification process, provide personal details, and make your first contribution.

How to Withdraw from NPS?

At the age of 60, individuals can withdraw up to 60% of the accumulated corpus as a lump sum. The remaining 40% must be used to purchase an annuity plan, which will provide a regular income stream during retirement. If an individual wishes to exit the scheme earlier than 60, the process involves some restrictions and conditions.

Note: Partial withdrawals are also allowed before retirement, subject to certain conditions, like for medical emergencies or children’s education.

NPS vs. PPF vs. EPF: Which One is Better?

While NPS, Public Provident Fund (PPF), and Employees’ Provident Fund (EPF) are all long-term investment options aimed at building retirement savings, there are several differences:

Interest Rates: PPF offers a fixed interest rate (currently 7.1% per annum), while NPS has the potential for higher returns due to its equity exposure.
Tax Benefits: Both NPS and PPF offer tax benefits, but NPS has an additional tax deduction of ₹50,000 under Section 80CCD(1B), which PPF does not offer.
Flexibility: NPS offers more flexibility in terms of asset allocation and the ability to switch between equity and debt based on market conditions.

Conclusion

The National Pension Scheme is a highly beneficial retirement planning tool for individuals looking for a secure financial future. With its tax advantages, flexibility, and low-cost structure, NPS stands out as an excellent option for retirement savings. Whether you are a government employee, a private sector worker, or self-employed, investing in NPS can help you build a reliable pension corpus that ensures financial stability in your retirement years.

TIPS: Start early, contribute regularly, and make the most of the benefits offered by NPS to secure a comfortable future for yourself and your loved ones.

FAQ

Q. What is the National Pension Scheme (NPS)?
A. The National Pension Scheme (NPS) is a government-backed retirement savings scheme that allows individuals to contribute towards their pension during their working years. It provides tax benefits and a steady income after retirement through a pension fund.

Q. Who is eligible to open an NPS account?
Any Indian citizen, including Non-Resident Indians (NRIs), between the ages of 18 and 65 years can open an NPS account.

Q. What are the two types of NPS accounts?

Tier I Account: A mandatory account where contributions are locked until retirement.
Tier II Account: A voluntary account that allows you to withdraw contributions at any time, but tax benefits are only available for Tier I.

Q. What are the tax benefits of NPS?

Contributions up to ₹1.5 lakh qualify for deduction under Section 80C.
An additional ₹50,000 tax deduction is available under Section 80CCD(1B) for NPS contributions.

Q. How is the NPS corpus invested?
NPS contributions are invested in a mix of equity, government bonds, and corporate securities based on the investor’s chosen asset allocation (Active or Auto Choice).

Q. Can I withdraw from my NPS account before retirement?
Partial withdrawals are allowed under specific conditions (e.g., medical emergencies, children’s education). However, the entire corpus can only be withdrawn after the age of 60, with 60% available as a lump sum and 40% used to purchase an annuity.

Q. How do I open an NPS account?
You can open an NPS account either online via the eNPS portal or offline by visiting a Point of Presence (PoP) like a bank or financial institution.

Q. What is the return on NPS investments?
The return on NPS varies depending on the asset allocation and market performance. Historically, NPS returns have outperformed traditional fixed-income investments like PPF and EPF.

Q. How can I check the performance of my NPS account?
You can track the performance of your NPS account through the NPS mobile app or website, where regular updates on investment returns and fund performance are provided.

Q. Can I transfer my NPS account if I change jobs?
Yes, NPS accounts are portable. If you change jobs or move to a new city, you can continue contributing to your existing NPS account without any interruption.