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What is National Pension Scheme (NPS) Scheme and Its Benefits?

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The NPS Scheme, also known as the National Pension Plan, is open to all employees in the public, private, and even unorganized sectors, except for those working in the armed forces. The NPS scheme allows a subscriber to make a minimum contribution of Rs. 6,000 for the fiscal year. This can be paid in a lump sum or in monthly installments of at least Rs. 500.

In the NPS scheme, participants’ contributions are invested in market-linked products such as bonds and stocks, and returns are dependent on the performance of these investments. The current interest rate for NPS is 9% to 12% on contributions.

An Indian citizen between the ages of 18 – 60 can open an account in the National Pension Scheme. The PFRDA-regulated National Pension Plan expires at age 60 and is renewable until age 70. Under the NPS program, a participant can partially withdraw up to 25% of premiums in certain circumstances, such as buying a home, funding a child’s education, or treating a critical illness, three years after opening the account.

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Returns on National Pension Scheme (NPS) Scheme

Although the Government Pension Plan does not have a fixed interest rate, investments are made in market-linked securities, so returns are based on the fund’s market performance. Contributions to the NPS program can be invested in four different asset classes including equities, government bonds, corporate bonds, and alternative investments through various pension funds. The earnings of these pension funds are subject to market movements in stocks and bonds.

The National Pension Plan is one of the most popular pension products in India. Investing in the NPS scheme not only offers investors advantages over other pension schemes but also offers tax exemption benefits under Sections 80C and 80CCD of the Income Tax Act. There is a vesting period until retirement, but early withdrawal is possible under certain circumstances. Under the details of the National Pension Plan, investors also have the advantage of diversifying their investments. Investors can choose to invest in the Fund automatically or manually.

Tax Benefits on National Pension Scheme (NPS) Scheme

Under Section 80C of the Income Tax Act, the National Pension Scheme allows tax exemption on contributions to the Scheme up to a maximum of INR 1.5 lakh. Additionally, under the NPS plan, both employer and employee contributions are counted as tax-exempt.

80CCD (1) – This is part of U/S 80’s own contribution. A deduction of up to 10% of your salary may qualify for tax exemption under this section. For self-employed taxpayers, this limit is 20% of gross income.

80CCD (2) – This section describes employer contributions to the NPS system. This incentive does not apply to self-employed taxpayers. The maximum amount eligible for tax exemption is the lower of:

A. Employer’s actual NPS contribution

B. 10% of base + affection allowance

C. Gross income.

Additional out-of-pocket contributions up to Rs 50,000 may be claimed as tax benefits for the National Pension Plan (NPS) under Section 80CCD(1B).

Benefits of Investing in the National Pension Scheme (NPS) Scheme

Below is the list of benefits of investing in the NPS Scheme:

Tax Benefits

Contributions to the NPS scheme up to a limit of Rs. 1.5 lakhs are eligible for exemption under section 80C of the Income Tax Act. Also, under the National Pension Plan, contributions from both employers and employees are tax-exempt.

Rate of Interest / Income

A portion of the contributions to the NPS program will be invested in stocks that offer higher returns compared to other traditional tax-saving investment options such as PPF. With interest rates ranging from 9% to 12%, this pension plan is ideal for those who want to accumulate money over the long term and enjoy financial security in retirement.

Premature Withdrawals

Participation in the national pension system is compulsory until the age of 60. However, partial withdrawal is possible after 3 years from the account opening date. Participants can withdraw up to 25% of their total contributions. Early payment is only possible in special circumstances, such as Financing a child’s education, buying a home, or in case of a medical emergency. A subscriber may pay up to three times at intervals of five years for the entire term. These rules only apply to Tier I accounts, not Tier II accounts.

Equity Allocation Rule

In the NPS scheme, investments are made in another scheme. Equity allocation rules allow investors to invest up to 50% of their investment in equities. There are two investment options for investing i.e., Active selection and automatic selection. Active selection allows investors to select funds and allocate investments according to their risk appetite and suitability. Automatic selection, on the other hand, takes into account the risk profile and age of the investor when investing.

Risk Assessment in NPS Scheme

NPS’s equity exposure is currently limited to 75% to 50%. For govt. employees, this limit is 50%. Within certain limits, the equity component is reduced by 2.5% each year from the year the investor reaches the age of 50. This evens out the investor risk/reward equation and protects the invested fund from stock market volatility. This program offers higher earning potential compared to other retirement programs.

Flexibility

The NPS program allows participants to contribute at any time during the fiscal year and to change the amount they wish to invest each year.

The National Pension Plan offers flexibility by allowing members to choose investment options, and pension funds and monitor the growth of their investments.

Withdrawals Rules on National Pension Scheme (NPS)

The NPS system does not allow a person to withdraw all accumulated funds from the account after retirement. The plan requires that a person must have at least 40% of their accumulated capital in order to receive a regular annuity from a PFRDA-registered insurance company. The remaining 60% of the reserve fund is tax-free.

Regulatory Body

The NPS program is regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). With regular monitoring and transparent investment standards, NPS provides transparency and credibility to its members.

NPS Scheme Fund Managers

A person/organization that makes decisions about an investment portfolio (usually a mutual fund, pension fund, or insurance fund) in accordance with the fund’s stated purpose. You must choose a fund manager when opening an account.

The fund will be managed by the seven fund managers appointed by the PFRDA. Pension funds registered with the NPS scheme are:

Pension Funds for Govt. Sectors in National Pension Scheme (NPS)

  • SBI Pension Fund Pvt. Ltd.
  • LIC Pension Fund Ltd.
  • UTI Retirement Solutions Ltd.

Pension Funds Other Than Government Sectors in National Pension Scheme (NPS)

  • HDFC Pension Management Company Limited
  • Tata Pension Management Limited
  • ICICI Prudential Pension Fund Management Company Limited
  • Max Life Pension Fund Management Limited
  • Kotak Mahindra Pension Fund Limited
  • Axis Pension Fund Management Limited

National Pension Scheme (NPS) Withdrawals Rules

Withdrawal of reserves from the NPS account is possible at the age of 60. However, NPS also offers the possibility of early payment under certain conditions. Let’s take a look at the NPS withdrawal process.

National Pension Scheme (NPS) Withdrawals: Before 60 Years

As a pension plan, investment in NPS is compulsory until the age of 60. However, after 3 years from the account opening date, partial withdrawals will be eligible. Participants can withdraw up to 25% of their total contributions. Early payment is only possible in special circumstances, such as Financing a child’s education, buying a home, or in case of a medical emergency. Participants may pay up to three times at intervals of five years for the entire term. These rules only apply to Tier I accounts, not Tier II accounts.

Withdrawal Forms

Form 102 GP – This form can be used by govt. employees who wish to withdraw prior to retirement.

Form 302 – This form can be used by private sector employees and other citizens who wish to withdraw before retirement.

Form 502 – Applies to members who are part of the Swabalamban sector and wish to withdraw prior to retirement.

National Pension Scheme (NPS) Withdrawals: After 60 Years

When the plan expires after 60 years, the participant can withdraw 60% of the accumulated corpus from his/her NPS account, and the remaining 40% of the accumulated amount will be used to purchase an annuity. Subscribers must provide payment details and bank accounts to Aggregators in order to upload their information to the CRA system for execution.

Withdrawal Forms

Form 101 GS – This form can be used by government employees who wish to receive post-retirement payments.

Form 301 – This form can be used by company employees and the general public who wish to receive pension payments.

Form 501 – Applies to members of the Swabalamban Sector who wish to withdraw their pension.

National Pension Scheme (NPS) Withdrawals: On Death of the NPS Account Holder

In the event of the participant’s death, the entirety of the preserved shares will pass to the beneficiary or legal heirs. The beneficiary or legal heir must contact the aggregator with the necessary documents such as the beneficiary’s identification, death certificate, etc. for the disbursement of funds.

Withdrawal Forms

Form 103 GD – This form is available for beneficiaries/legal heirs of government employees who were NPS participants. Designees may complete a form to claim amounts accumulated in the subscriber’s account.

Form 303 – This form is available for use by company employees and other citizen beneficiaries/legal heirs who were NPS participants. Designees may complete a form to claim amounts accumulated in the subscriber’s account.

Form 503 – Applies to beneficiaries/legal heirs of participants who were part of the Swavalamban sector.

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FAQs on National Pension Scheme (NPS)

Who can open a National Pension Scheme (NPS) Account?

A National Pension account can be opened by any person between the ages of 18 and 60.

The National Pension Plan is ideal for those who cannot make decisions about asset allocation or who do not have time to manage their investments.

NPS is a fully government-backed scheme, and anyone planning early retirement and not wanting to take high risks should definitely opt for it.

Employees looking to maximize their 80C deduction should consider the National Pension Plan.

What is the interest rate in National Pension Scheme (NPS) Scheme?

The National Pension Scheme currently has interest rates between 9% and 12%, depending on the member and type of scheme.

The National Pension Plan offers its members a variety of investment options and also the opportunity to choose a fund manager of their choice. Depending on the scheme chosen, NPS offers interest rates of up to 9% to 12% compared to other investment vehicles.

Is National Pension Scheme (NPS) taxable or tax-free on maturity?

NPS returns are typically higher than other investment vehicles such as Fixed Deposits (FD) and Public Provident Funds (PPF). Since NPS falls under the EEE investment category, investments made with maturity benefits under the NPS program are not taxable.

Is withdrawal before retirement possible in National Pension Scheme (NPS) scheme?

You can withdraw your money at any time before you retire, but somehow the benefits of the National Pension Plan come the most after your tenure ends, so it’s a good idea to keep your investments the longest.

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