/ Articles / By
INDEX

  • Latest Update

  • Whats is National Payment system

  • NPS Vatsalya Pension Scheme

  • Key features of NPS

  • Eligibilty Criteria For NPS

  • Types of NPS Accounts

  • Advantages of NPS

  • Disadvantages of NPS

  • How to Open An NPS Account

National Pension Scheme (NPS)

Latest Update:

The Budget 2024-25 has proposed the introduction of the NPS Vatsalya scheme, which allows parents to open an NPS account for their minor children. Under this scheme, parents can contribute to the account either monthly or annually until the child turns 18 years old. Once the child reaches 18, the account can be converted into a normal NPS account, and the child can manage it independently.

Additionally, the CBDT has notified Form 12BBA, a declaration form that eligible senior citizens can submit to specified banks. This form will help senior citizens take relief from filing the Income Tax Return (ITR).

Introduction to National Pension System (NPS)

The National Pension System (NPS) is a voluntary, long-term retirement savings scheme introduced by the Government of India in 2004. Initially designed for government employees, it was later extended to all Indian citizens in 2009. NPS aims to promote retirement savings and ensure financial security for individuals in their old age.

Managed by the Pension Fund Regulatory and Development Authority (PFRDA), NPS offers individuals the chance to save for retirement while benefiting from tax incentives and market-linked returns.

NPS Vatsalya Pension Scheme:

Particulars

Details

Scheme Name

NPS Vatsalya Pension Scheme

Minimum Entry Age

18 years

Maximum Entry Age

65 years

Annuity Purchase

40% of the corpus is used to purchase an annuity

Withdrawal at Retirement

Up to 60% of the accumulated corpus

Pension Start Age

After 60 years

Tax Deduction

Under Section 80C and 80CCD

Key Features of NPS

1. Market-Linked Returns

NPS is a market-linked investment scheme, meaning returns depend on the performance of asset classes chosen by the investor. These assets can include equities (E), government securities (G), corporate bonds (C), and alternative investment funds (AIF). As a result, NPS offers the potential for higher returns compared to traditional savings options over time.

2. Tax Benefits

NPS provides attractive tax benefits, making it an efficient way to save for retirement.

  • Under Section 80C of the Income Tax Act, individuals can claim a deduction of up to INR 1.5 lakh per year for NPS contributions.
  • Additionally, Section 80CCD(1B) provides an extra deduction of INR 50,000, over and above the Section 80C limit, making NPS a powerful tax-saving tool.
  • On withdrawal, 60% of the corpus is tax-free, while the remaining 40% must be used to purchase an annuity (taxable as income).
3. Flexible Contribution Options

NPS allows flexible contributions on a monthly, quarterly, or annual basis. While the minimum contribution is INR 500 per month for Tier-I accounts, there’s no upper limit on contributions, and individuals can contribute as much as they want, subject to tax limits. This flexibility ensures that NPS suits a variety of financial goals and lifestyles.

4. Withdrawal and Annuity
    • Upon reaching the age of 60, individuals can withdraw up to 60% of the corpus as a lump sum, which is tax-free.
    • The remaining 40% of the corpus must be used to buy an annuity from any registered insurance company. The annuity payments are taxable as income.
5. Portability

NPS is portable across jobs and locations. Whether you change employers, cities, or states, your NPS account will remain active, and contributions can continue seamlessly. This portability ensures that individuals do not lose their retirement savings when they switch jobs or move to different regions.

Investment Flexibility and Choice

1. Asset Allocation Choices

NPS gives you the freedom to choose between different asset classes based on your risk tolerance. The options are:

  • Equity (E): Higher potential returns, with a higher risk.
  • Corporate Bonds (C): Moderate returns with lower risk.
  • Government Bonds (G): Safe but lower returns.
  • Alternative Investment Funds (AIF): To diversify your portfolio further.

Investors can also choose between Active Choice (where they select asset allocation) and Auto Choice (where asset allocation depends on the individual’s age).

2. Pension Fund Managers (PFMs)

NPS offers a selection of Pension Fund Managers (PFMs) who manage the investments. These managers are responsible for allocating the funds in a way that aligns with the chosen asset classes. You can select a PFM based on their performance and expertise.

Eligibility Criteria for NPS

NPS is open to all Indian citizens, including residents and non-residents, between the ages of 18 and 65 years. It is available to everyone, whether employed in the public sector, private sector, or even those who are self-employed.

There is no requirement to have a specific income level, making NPS accessible to people from all walks of life.

NPS Account Types
1. Tier-I Account

The Tier-I account is the primary NPS account and focuses on long-term retirement savings. It has a lock-in period until the individual turns 60. Contributions made to this account qualify for tax benefits. Withdrawing funds before retirement is not allowed, ensuring that the savings are preserved for retirement.

2. Tier-II Account

The Tier-II account is a voluntary account offering greater flexibility. You can withdraw funds at any time without restrictions. However, this account does not provide the same tax benefits as the Tier-I account. It is suitable for individuals who want to save but need more liquidity.

Benefits of NPS

1. Tax Efficiency

NPS offers a substantial tax benefit, making it an attractive retirement-saving option. The combination of Section 80C and 80CCD(1B) deductions provides an excellent opportunity to lower taxable income. Moreover, the tax-deferred nature of the returns is another major advantage.

2. Low-Cost Investment

NPS is known for its low management fees compared to other retirement schemes. The minimal administrative charges ensure that a greater portion of your contribution goes toward building your retirement corpus.

3. Government-Backed Safety

Being regulated by the PFRDA, NPS provides a sense of security and reliability, as it is backed by the government. This is particularly reassuring for conservative investors who prioritize safety in their retirement planning.

4. Retirement Security

The NPS guarantees that 40% of the corpus will be used to buy an annuity, providing you with a regular income post-retirement. This structured approach ensures a reliable income stream during the retirement years.

Disadvantages of NPS
1. Mandatory Annuity Purchase

One significant drawback is that, upon withdrawal, 40% of the corpus must be used to purchase an annuity. The annuity payments are taxable as income, which could be a disadvantage for some individuals who prefer to manage their corpus as a lump sum.

2. Lock-in Period

Tier-I accounts have a lock-in period until the individual reaches the age of 60. This could be restrictive for those who need liquidity before retirement. However, the long-term nature of the scheme is designed to build a corpus for retirement.

3. Market Risk

Since NPS is a market-linked investment, returns are subject to market fluctuations. In times of market volatility, the returns may not be as high as expected, which could impact the retirement corpus.

How to Open an NPS Account

Opening an NPS account is easy and can be done through two primary methods:

  1. Online:
    You can open an NPS account through the official NSDL or Karvy websites, or directly on the PFRDA platform. The process involves submitting Aadhaar and PAN details for KYC verification.

  2. Through Point of Presence (POP):
    Visit any Point of Presence (POP), such as banks or financial institutions, authorized by PFRDA. These locations can assist with the account opening process and ensure that all documentation is correctly submitted.

Conclusion

The National Pension System (NPS) offers a robust and flexible framework for retirement planning. With market-linked returns, tax benefits, and portability, NPS provides a practical solution to secure your retirement. Its low-cost structure, diverse investment options, and the mandatory annuity purchase at retirement make it an attractive option for those planning for long-term financial security.

Although there are some restrictions, such as the mandatory annuity purchase and the lock-in period for Tier-I accounts, the benefits far outweigh these drawbacks. By contributing early and regularly, you can build a substantial corpus that ensures a comfortable and financially independent retirement.

NPS remains a powerful tool for securing your future and ensuring that your retirement years are financially stable and stress-free.

RELATED ARTICLES
 

Related Posts