The National Pension System(NPS) is a good investment option if you want to secure your future. The NPS is a market-linked defined contribution plan that helps you save for retirement. It is one of the most effective strategies to increase your retirement income while saving taxes. It lets you plan a financially secure retirement through systematic, scheduled savings. This post will help the users understand the National Pension System Scheme and its benefits.
Understanding NPS
The National Pension System (NPS) was introduced in India by the Central Government on January 1, 2004. It is a government-sponsored retirement savings scheme that replaced the Defined Benefit Pension System with a Defined Contribution-based Pension System.
The NPS is a voluntary and flexible market-linked, defined-contribution retirement savings account. It is a low-cost, tax-efficient, and easily accessible scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
In the NPS, individuals contribute to their retirement accounts, and their employers may additionally contribute to their social security and welfare. Contributions from the employee are collected and accumulated in an individual pension account called the Permanent Retirement Account Number (PRAN).
Types of NPS account
Tier I NPS account
- To join NPS, you must first create a Tier I account.
- Withdrawals from this account are restricted and conditional.
- You can open a Tier I NPS account with a minimum contribution of Rs.500. To keep the Tier I NPS Account active, you must deposit a minimum of Rs.1,000 annually.
Tier II
- Tier II NPS accounts are optional and can be opened concurrently or after Tier I NPS accounts.
- You may withdraw money from this account at any time.
- Tier II NPS accounts can be opened with an initial deposit of Rs.1000. You are not required to deposit a certain amount each year to keep the account operational.
How to Open an NPS Account?
There are 2 ways through which you can open a National Pension Scheme account:
Visit the Nearest Point of Presence (PoP)
- Visit your nearest PoP, such as a head post office
- Submit the PRAN application with the KYC documents.
- Make your initial donation (minimum of Rs 500) while applying for registration.
- The CRA will send the PRAN card to your correspondence address.
Open an NPS Account Online
- Steps to NPS Account opening Visit the e-NPS website. Click on the National Pension System – registration – and choose the individual option.
- Enter your PAN and your name, age, address, email address, and phone number. You will receive an OTP for verification at the cellphone number associated with your PAN.
- Then, you must choose your preferred account type: Tier I and Tier II.
- Choose your pension fund manager. Eight pension fund institutions administer contributions to your NPS Account. You can select your desired Pension Fund Manager from the list.
- Choose your investment mode.
- Assign nominees.
- Upload all the required documents. You must upload scanned copies of less than 12KB.
- To complete the registration procedure, you must make an initial contribution to your NPS Account. You can pay with your Internet Banking, Credit, or Debit Card. The minimum contribution for Tier I accounts is Rs 500, while Tier II accounts require Rs 1,000.
- Download the form.
Your PRAN will be generated, and your PRAN kit, which includes your PRAN card and scheme papers, will be mailed to your registered address. To finish the registration process, print the supplied form, paste your photo, attach the appropriate document copies, and e-mail it to the Central Recordkeeping Agency (CRA) within 90 days after creating your eNPS account. Failure to do so will result in your NPS account being frozen.
Benefits of Opening an NPS Account
The benefits of opening a National Pension Scheme account include:
- Flexibility. Users can choose their own investment options and pension funds.
- Portability. Users can operate their accounts from anywhere, even if they change cities or employment.
- Tax benefits. Users can claim tax benefits under Section 80 CCD (1) within the overall ceiling of Rs. 1.5 Lakh under Section 80 CCE. NPS users also get an additional deduction for investments up to Rs. 50,000 in Tier I accounts under subsection 80CCD (1B).
- Pension. After retirement, a fixed amount of the corpus fund can be withdrawn, and the remaining amount will be paid to users monthly as pension remuneration. The pension is payable for 5, 10, 15, or 20 years certain and after that, as long as the subscriber is alive.
What are the Investment Modes?
In the NPS, subscribers can choose between Active Choice and Auto Choice when investing:
- Active Choice: Subscribers choose their asset mix and the percentage of their contributions to each asset class. This option is for users who want to manage their portfolios actively. However, there are limitations, such as a maximum of 75% equity exposure up to age 50, which is reduced by 2.5% annually.
- Auto Choice: Users choose an automatic allocation based on a life-cycle approach. This option is for users who do not want to get involved in portfolio decision-making. The allocation starts with an equity-heavy portfolio and gradually reduces equity exposure as the users approach retirement. The Aggressive Life Cycle Fund in the Auto Choice option allows the highest equity exposure.
Consider creating a National Pension Scheme account if you seek a dependable investment/savings option to ensure sufficient funds for your post-retirement years. It will allow you to live a financially independent life after retirement.