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What is National Pension Scheme (NPS) Scheme?

When COVID-19 broke out, many sought to secure their future, especially in their prime. One such financial tool that has caught people’s attention is the National Pension System (NPS), which saw a significant 30% year-on-year increase in total subscribers.

If you want to make an informed investment decision, consider the National Pension Plan, commonly known as NPS. Investing in this financial product will not only increase your wealth and make a solid retirement plan, but it will also help you save on taxes.

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What is National Pension Scheme (NPS) Scheme

 NPS is an initiative of the Government of India that aims to provide pension benefits to all citizens of India, including those in the unorganized sector. Regulated & administered by the Pension Fund Regulatory and Development Authority (PFRDA) under the Act 2013, NPS is a defined voluntary contribution scheme linked to the market and managed by professional fund managers.

Contributions by individual participants to the scheme-based national pension plan are cumulative until retirement, continuing physical growth through market-linked returns. Participants may also choose to terminate this plan prior to retirement or opt for a retirement annuity. However, under this scheme, part of the savings is used to provide retirement benefits to participants.

For example, upon retirement, retirement or retirement, at least 40% of the contributions will be used to finance a life annuity through the purchase of an annuity. The balance will be paid to the subscriber in one lump sum.

Objectives of the National Pension Scheme (NPS) Scheme

  • Building a substantive corpus for the retirement stage is an important aspect in financial planning.
  • Not only will individuals be able to meet their spending needs, but they will be able to get through retirement with minimal fuss.
  • To address these concerns about the country’s aging demographic, the Indian government has created a national pension scheme and a .
  • The system allows for systematic savings through years of service and gives individuals the financial discipline to save for the future.

What is National Pension Scheme (NPS) and how it works

NPS plays an important role in deciding where individuals will invest their retirement assets. NPS account holders may make regular contributions to their retirement accounts during their tenure.

Those who have an NPS account must deposit at least Rs. 6,000 each year. After continuing to invest until retirement, they can withdraw some of the totals, about 60%, and put it to good use. The remaining amount, preferably 40% of the total investment, should be used to purchase an annuity and build a means of stable income in retirement. In the unfortunate event that an account holder dies under the age of 60, all accrued amounts will be paid to the account holder’s designees or legal heirs.

Features of the National Pension Scheme (NPS)

As a government-sponsored pension scheme, the details of the National Pension Scheme and some of the salient features of the NPS are listed below.

  • Part of the national pension goes into stock.
  • The returns offered by the National Pension Plan are much higher than traditional tax-saving investment vehicles such as PPFs.
  • This pension plan offers annual returns of 9% to 12%. If that person is dissatisfied with the fund’s performance, they can switch fund managers.
  • For NPS under Section 80C of Income Tax Act, maximum he can claim a deduction of Rs 1.5 lakh.
  • For Tier I accounts, the subscriber must make an annual contribution of Rs. 6,000 and Rs. 500 as a one-time donation. For Tier II accounts, the subscriber must make an annual contribution of Rs. 2000 and a one-time donation of Rs.250.
  • In old age, the whole body cannot be separated from the national pension. An NPS account allows only 60% of the fund to be withdrawn after retirement, with the remaining 40% invested in the pension plan to receive a regular pension.
  • Online or offline he can open an NPS account.
  • You can pay up to 3 times during your term of office within 5 years.
  • Once he completes an NPS account for three consecutive years, he can withdraw up to 25% of the accumulated balance for specific purposes such as medical care, higher education, marriage, and home purchase.

What are National Pension Scheme (NPS) Tier-I and Tier-II

There are two types of NPS accounts:

Tier I NPS Account and Tier II NPS Account. A Tier I NPS account cannot be withdrawn until the account holder reaches the age of 60 or has retired. Tier II NPS accounts, on the other hand, function as any savings account. Individuals with Tier II accounts can withdraw their accumulated funds at any time. Note that the amount accumulated in the National Pension Plan (NPS) account is entirely dependent on two factors. One is the annual contribution you voluntarily make to your NPS account, and the other is the income you earn by investing 40% of the maturity amount in the purchase of an annuity.

You have the option to open two sub-accounts with the same Permanent Retirement Account Number (PRAN). These subaccounts are called levels in NPS.

Tier-I Account:

This is a basic pension account with restrictions on withdrawals.

Until the age of 60, only 25% of the premium can be withdrawn and the remaining 75% must be used to purchase an annuity from a life insurance company. It is a series of payments made at regular intervals. An annuity plan requires the insurance company to make periodic payments of the insurance proceeds until the insured person dies or the plan matures.

Even after reaching retirement age (age 60), almost 60% of the premium can be withdrawn and the remaining 40% must be used again to purchase an annuity from an approved life insurance company.

Tier-II Account:

You can invest additional amounts in your Tier II NPS account. Subscribers are free to withdraw their accumulated Tier II inventory at any time. If you haven’t even made your first contribution to Tier II a/c, you will be automatically deactivated following the instructions. There are no tax benefits for this account. Funds from Tier II can be transferred to Tier I

Funds from Tier I cannot be transferred to Tier II.

Difference Between National Pension Scheme (NPS) Tier-I & NPS Tier-II Account

Let’s understand the point-wise difference between the NPS accounts:

Eligibility Criteria:

NPS Tier-I: Any Indian citizen between 18 & 65 years of age.

NPS Tier-II: Only Tier-I members can open and invest in Tier-II.

Lock-in Period:

NPS Tier-I: Till the age of 60 years.

NPS Tier-II: Nil

Minimum Number of Contributions Per Year:

NPS Tier-I: It’s mandatory to contribute at least one time per year.

NPS Tier-II: You can choose not to make any contribution in a year.

Minimum Contribution for Account Opening:

NPS Tier-I: Rs 500/-

NPS Tier-II: Rs 1,000/-

Minimum No. of Annual Contribution:

NPS Tier-1: Rs 6,000/-

NPS Tier-II: Not Mandatory.

Fund Management Charge:

NPS Tier-I: Same as Tier-II

NPS Tier-II: Same as Tier-I

Tax Benefits on National Pension Scheme (NPS)

NPS Tier-I: Allowed up to Rs.50,000 as deductions towards Tier-I contributions under 80CCD 1(B)

NPS Tier-II: No Tax benefit.

Tax on Withdrawl:

NPS Tier-I: The entire corpus at the time of maturity is Tax-exempted.

NPS Tier-II: The entire corpus can be withdrawn but is added to income and taxed as per the Tax slab.

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FAQs on National Pension Scheme (NPS)

How to Open a National Pension Scheme (NPS) Account?

  • NPS account can be opened thru any one CRA (K-fin Technologies Pvt. Ltd. Or NSDL e-governance infra Ltd.).
  • Fill all the mandatory information in an online form.
  • After filling in all the mandatory details, an acknowledgment Id will be generated. Complete the registration within 15 days after receiving the acknowledgment Id.
  • Next step is to complete KYC verification.
  • Share the details like PAN Card No., Bank Details, Scheme Details, Nominee Details, etc.
  • Then upload your latest photograph, signature, canceled cheque or bank statement or passbook copy & PAN copy within the permissible file size.
  • Then you can contribute opening amount which will be shown in your transaction later. The opening amount is up to you but shall be minimum Rs. 500/-
  • Complete your payment thru various available modes of payment.
  • A 12-digit PRAN will be generated after successful payment. PRAN will be sent to you on your registered mobile number and email-id.

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

Indian citizens between the ages of 18 and her 60s are eligible to open an NPS account. Each NPS account holder is given her 12-digit unique number called the Permanent Retirement Account Number (PRAN). The only requirement is that the person must adhere to the required Know Your Customer (KYC) standards. Each NPS account holder is given her 12-digit unique number called the Permanent Retirement Account Number (PRAN).

Is National Pension Scheme (NPS) Scheme applicable for NRIs?

Yes, NRIs can choose to use the National Pension Plan to develop an age corpus provided they retain residency status until they exit the NPS Scheme.

Can I open more than one National Pension Scheme (NPS) account?

No, you cannot use multiple accounts for one individual as the program includes his/her PRAN which is unique to each individual.

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.