- Date : 01/06/2022
- Read: 4 mins
NPS (National Pension Scheme) is a voluntary defined contribution scheme. It would be wise to have it as a part of your monetary portfolio since it offers significant benefits upon retirement.
The National Pension Scheme (NPS) was established by the Pension Fund Regulatory and Development Authority (PFRDA) in 2004 as a retirement-oriented savings vehicle. Anyone between the ages of 18 and 60 years can register an NPS account and start saving for retirement.
Subscriber money is pooled and invested in various equities and debt instruments that provide long-term returns, with PFRDA-registered fund managers overseeing the investment portfolio.
Investors have the option of switching fund houses if they believe the fund's performance falls short of the market or any benchmark. After three years, you can withdraw up to 25% of your NPS Account investment, but only for particular objectives such as home purchases, children's education, weddings, and so on.
NPS Account Features
- At maturity, 40% of the NPS corpus is tax free, while the remaining 60% is taxable.
- A minimum of 40% of the corpus should be spent to purchase an annuity.
- The money used to buy an annuity is tax free.
- Any lump-sum withdrawal is taxed at the time of withdrawal.
- Your corpus will be tax free if you withdraw about 40% and purchase an annuity with the remaining 60%.
- The annuity pension is taxable according to the account holder's tax bracket.
- Initially, the total tax exemption in NPS was INR 1.5 lakhs per year. After Section 80(C) of the IT Act, it was increased to INR 2 lakh per year. After Equity Linked Savings Schemes (ELSS), NPS is considered the second-best option in terms of tax savings.
Types of NPS Accounts
Tier 1 NPS Account:
This is an essential NPS account. Investments in it qualify for tax benefits under Section 80 (C). Investing in this form of NPS account gives National Pension System members with an additional tax exemption benefit of INR 50,000, whereas the regular cumulative 80(C) benefit is only up to INR 1.5 lakhs. Withdrawals from this account, however, are restricted significantly, and only allowed upon retirement.
NPS Tier 2 Account:
For NPS subscribers who hold a Tier 1 NPS account, this one is a complimentary retirement cum investing account. Tax benefits are not available for investments made into the Tier 2 account. Furthermore, only if the tier 1 account is in good standing are investments permitted into this account. The NPS Tier 2 Account does not have any withdrawal limits on investments placed into it, according to current NPS guidelines.
Guide: Steps to open an NPS account
Step 1: Go to the NSDL website and select the registration option.
Step 2: After submitting your Aadhaar Card or PAN details, an OTP will be given to your registered mobile number.
Step 3: Select the account type you want to open.
Step 4: To complete the process totally online, select Aadhaar as your identity document.
Step 5: To generate your acknowledgement number, enter in your personal information and click submit.
Step 6: Select one of seven pension funds, which is an important step. You must also select an investing mode and assign nominees.
Step 7: Finally, upload the photo and signature before paying.
Step 8: You will be assigned a PRAN (Permanent Retirement Account Number).
Given the ease with which an NPS account can be opened, NPS becomes an attractive option for any investor who does not want to take a high risk with their finances. It also works well to diversify your investment portfolio and for investors who do not have the time to keep themselves updated and knowledgeable as would be needed with other investment avenues.