As we dream of a peaceful and leisurely life post-retirement, the key to turning those dreams into reality lies in thoughtful planning and choosing the suitable investment for the retirement. In this regard, the National Pension System (NPS) emerges as a dedicated investment plan tailored for retirement, promising a regular pension during your golden years. It is a voluntary retirement savings account enabling you to build a substantial corpus return with its market-linked return, that too with tax benefits.
In this blog, we will learn more about NPS, its eligibility, returns, features and benefits. We will also look at how it works, what withdrawal rules are, and how you can invest in NPS. So, let’s start.
NPS Stands for National Pension System. The NPS, overseen by the Pension Fund Regulatory and Development Authority of India (PFRDA), was introduced by the central government in 2004. It was initially exclusive to central government employees, providing them with a platform to invest and accumulate returns for their retirement. Subsequently, in 2009, the PFRDA expanded its reach, making it accessible to all Indian citizens. Moreover, investments made in the NPS qualify for tax deductions under Section 80C and Section 80CCD.
The NPS offers two different account types you can consider. These are NPS Tier 1 and Tier 2 account:
The NPS is a structured retirement savings plan designed to provide financial security during old age. NPS offers two types of accounts: Tier 1 account and Tier 2 account.
A tier 1 account is the primary NPS account, which comes with a mandatory lock-in period of 60 years of age and also provides you with the tax benefit. However, a Tier 2 account is a voluntary account with no lock-in period, meaning you can withdraw it anytime. There are no tax benefits in the Tier 2 account.
When you invest in NPS, your contributions are invested in different asset classes, Such as Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A). NPS offers flexibility in asset allocation through two choices: Active Choice and Auto choice.
In the active choice, you decide how much money is allocated to each NPS asset class based on your risk tolerance and financial goals.
In the auto choice, the allocation is determined based on your age, providing a more hands-free approach.
The funds within NPS are market-linked, meaning their performance depends on market fluctuations. This allows the potential for growth over the long term.
Upon reaching 60, your NPS account matures, and you can withdraw 60% of the total corpus as lumpsum payment. The remaining 40% is used to purchase an annuity, providing a regular pension based on the type of plan chosen.
Any individual who satisfies the following NPS eligibility criteria can invest in the scheme.
Pension fund management companies, also known as pension fund managers (PFMs), who play an important role in managing your funds, are appointed by the PFRDA. They are responsible for making investment decisions on behalf of you. Also, they handle the allocation of funds across various asset classes, such as equity, corporate bonds, and government securities, based on your investment strategy and risk profile.
When you choose to start your investment in NPS, you must select the pension fund managers of your choice who will manage your investment on your behalf. Pension fund managers play a pivotal role in safeguarding and growing your investment. Hence, selecting the best pension fund managers for your investment is important.
Currently, there are 10 pension fund managers:
With its host of features and benefits, NPS has become a popular investment avenue among investors who want to save for retirement. Here are some of the features of the NPS that make it an attractive option for investors.
You can open an NPS account through the ET Money app or website. Here is the step-by-step process to open NPS account.
Step 1: Download and install the ET Money app.
Step 2: Click on the NPS option and click “Invest Now.”
Step 3: Enter basic details, select a plan (Aggressive, Moderate, Conservative, or custom), and choose a fund manager.
Step 4: Enter the investment amount (Monthly SIP or lump sum), and click on “confirm”.
Step 5: Verify personal details, set up payment through EasyPay or Bank Mandate, and complete the payment to activate your NPS account.
Step 1: Go to the ET Money website.
Step 2: Select NPS under the “More” tab and click on “Invest Now.”
Step 3: Provide your basic details and select a plan (Aggressive, Moderate, Conservative, or custom) and fund manager.
Step 4: Enter the monthly SIP amount or lumpsum amount you wish to invest and click on “confirm”.
Step 5: Verify your details, set up payment through EasyPay or Bank Mandate, and complete the payment to activate your NPS account.
The following are the documents required to open an NPS account:
NPS matures when you turn 60 years of age, this means you will be only able withdraw your corpus only when you are 60. As per NPS withdrawal rules, you receive 60% of your total accumulated corpus at maturity. And for the remaining 40%, you will have to purchase an annuity plan. Let’s understand with an example.
Say your accumulated corpus at maturity is Rs 1 crore. Then, in this case, you will be able to withdraw Rs 60 lakh (60% of Rs 1 crore) at maturity. The remaining Rs 40 lakh must be invested in the annuity pension plan. But what if you require some funds before maturity? So, in this case, NPS also allows you to withdraw before maturity. Let’s get into the details.
You can withdraw from your NPS account before maturity for some specific purposes, such as building a house, educating your children, or dealing with medical emergencies.
You can withdraw up to 25% of the Tier I corpus, but withdrawals are only permissible after three years.
Apart from this, you are only allowed to make three partial withdrawal requests before reaching the age of 60. However, there must be a minimum gap of five years between any two withdrawals, except in the case of medical emergencies.
One of the key benefits of the NPS is that it allows you to build a substantial corpus for your retirement. However, this is not the only benefit of NPS; there are other benefits also:
NPS return is determined on the basis of the performance of the underlying assets. These underlying assets are Equity, Corporate debt, Government Securities, and Alternative Investment Assets). When you invest in NPS, your investment is allocated to all these assets, which are classed based on your pre-determined allocation.
Market fluctuations influence these underlying assets, and there may be an increase or decrease in their value. So, when the value of these assets increases, your investment value also increases, and vice versa. Hence, the returns received upon retirement cannot be determined beforehand. However, comparing the past performance, the NPS interest rate ranges between 9%-12%.
In planning for retirement, estimating the exact amount needed can be challenging, considering factors like inflation and unexpected expenses. To navigate these challenges, considering the National Pension System (NPS) as a core retirement savings tool is beneficial. By supplementing it with other instruments, you can build a substantial retirement corpus that is inflation-proof and aligns with your financial needs, providing a more comprehensive approach to securing your future.
If you have decided to invest in NPS but are not sure about how much you will have to invest. Then, you can use our NPS calculator to determine the required investment amount to achieve your predetermined retirement corpus.
The NPS and PPF are two different saving schemes offered by the government. NPS is a market-linked investment product specifically focused on retirement solutions and comes with a lock-in of 60 years of an individual’s age. It offers market-linked returns based on the performance of the underlying assets. Meanwhile, PPF is a normal saving scheme that offers a guaranteed return on your investment and comes with a 15-year maturity but can also be further extended in blocks of 5 years.
What is the difference between Atal Pension Yojana and NPS?NPS and Atal Pension Yojana are both retirement solutions offered by the Government of India. APY is specifically designed for the unorganised sector workers, offering them a guaranteed pension of upto Rs 5,000 per month. In APY, the government also contributes upto Rs 1,000 to the subscriber account. Meanwhile, NPS is a voluntary retirement savings scheme that allows you to build a substantial corpus for your retirement. It offers a market-linked return on your investment based on the performance of the underlying assets in which it invests.
When should one start planning for NPS in their life?It is favourable to start investing in NPS as soon as you start earning. Starting early allows you to make smaller contributions over a longer period. In this way, you can accumulate a higher corpus in the long term.
Is NPS a good investment?NPS is a popular retirement saving option that allows you to earn market-linked returns on your investments, along with tax benefits. As it also invests in equities, it has the potential to give inflation-beating returns. With these advantages, NPS emerges as a favourable investment option.
Which is better, NPS or LIC?NPS and LIC are two different investment options. While NPS is a tax-saving retirement solution with a market-linked return, LIC offers life insurance with a savings component. So, choosing between NPS and LIC depends on your preferences and financial goals.
How many years will NPS pay pension?The period for which you will receive an NPS pension depends on the type of annuity plan you have chosen. It may end at the time of your death and can be extended to your spouse, dependent parents, and finally to the legal heir, based on the type of NPS plan.
What is the lock period of NPS?NPS comes with a lock-in period of 60 years of age. This means you can only withdraw when you turn 60 years old.
Is NPS tax-free on maturity?Yes, NPS is tax-free on maturity. At maturity, you receive 60% of your corpus as lumpsum payment, which is tax-free. For the remaining 40%, you have to purchase an annuity plan. However, annuity income received from NPS is chargeable as per your income tax slab.
Is NPS monthly or yearly?NPS offers a flexible approach to investing wherein you can invest regularly, either monthly or yearly, to build a large corpus for your retirement.
What is NPS in income tax?In Income tax, NPS is the tax-saving investment option that allows you to claim tax deductions of upto Rs 2 lakh (Rs 1.5 lakh under Section 80CCD(1) and Rs 50,000 u/s 80CCD(1B)). Apart from this, employer contribution is also eligible for tax deduction upto 10% of salary under Section 80CCD(2).
What is the role of PFRDA in NPS?PFRDA is a government body responsible for the NPS scheme’s regulation and management.
Share this story
Written By Sridhar SahuSridhar Kumar Sahu is a Content Writer for ET Money. He has over six years of experience in covering personal finance topics and markets. He holds a Master’s degree in English Journalism from IIMC, New Delhi and B.Tech in Mechanical Engineering from BPUT, Odisha.
