What are the Benefits of an NPS(National Pension System) Account?

There are various retirement savings schemes made available by the Government of India for people who want to save and plan for their retirement. Retirement savings schemes like PPF or EPF were already available for investors, but they had their own limitations. National Pension Scheme (NPS) was initially launched by the government in 2004 for government employees to replace the old pension scheme, which was opened to all in 2009.NPS allows everyone to invest for their retirement corpus while they earn and then start receiving the same in the form of a regular pension once they retire. Let us understand NPS and its features in detail.

The National Pension Scheme (NPS) is a social security scheme launched by the GOI which is regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA). It was launched in 2004 to replace the old pension scheme and hence it only covered the central government employees during its initial years. But in 2009, PFRDA opened this scheme for all Indian citizens. Now any Indian citizen except army personnel can voluntarily invest in NPS to invest to create a retirement corpus.The money that you invest in your NPS account is pooled into a pension fund which is managed by one of the six PFRDA approved fund managers. Such pension funds invest in a diversified portfolio that includes government securities, corporate bonds, and equity shares. Investors also have the option to choose a pension fund that invests in assets that suit their risk profile. There are two available options for investors in NPS to choose the asset mix of their fund, Auto choice or Active choice.Auto choice selects a pension fund according to the age of the investor. Hence, it selects an aggressive and risky portfolio if your age is less and as you age, it decreases the allocation of risky assets and increases the allocation of stable assets.Active choice allows the investor to choose the proportions of assets the funds invest in. Investors get to make their own asset mix under this option. However, under both options maximum exposure in equity is limited to 75%.If an investor is not satisfied with the performance of the fund manager of their pension fund, the investor can also change their fund manager or the pension scheme from the available options.An additional feature of NPS is that it also gives the option to the investor to open a Tier II account which remains a subsidiary of their main NPS account also known as a Tier I account. Investors who want to voluntarily invest without any withdrawal restrictions and with a short-term investment horizon can use the Tier II account for the same. They can keep investing in Tier I for their retirement corpus while they can use the Tier II account for other investment goals. Investors can also choose different asset mix or strategy for both accounts. Also read: Difference Between Tier 1 and Tier 2 NPS

Opening your NPS account is really easy. You just need to fulfil the eligibility criteria given by PFRDA and you can easily open your NPS account online or offline. Here are the eligibility criteria:

• Should be an Indian citizen or a Non-Resident Indian (NRI).
• Should be between the age of 18 – 70 years.
• Must comply with the Know Your Customer (KYC) regulations mentioned in the application form.

NPS account can be easily opened in one of the two ways. Also read : Who should Invest in NPS?

Opening NPS Account Online

You can open your NPS account online by visiting the eNPS portal and registering yourself as an Individual subscriber. You need to enter your PAN details and select a bank or PoP (Point of Presence). If you have a bank account or a demat account with the available PoP, the KYC process will be easier as they might already have your updated KYC details.After uploading the required documents and paying the account opening charges online, your PRAN (Permanent Retirement Account Number) will be generated and delivered to you. You can then start investing in your NPS Account.

If you want to open an NPS account offline or manually, you can visit a PoP – Point of Presence (which can be the home branch of your bank as well). The list of empanelled PoP can be viewed from the eNPS portal .After visiting the PoP, you can submit a subscriber form with the required KYC documents. If you are visiting your bank which is a PoP, you do not need to submit the KYC documents as you might already be KYC-compliant with your bank.The PoP will issue you a PRAN, once you pay the registration cost and make the initial contribution (not less than ₹500) to your NPS account. You can easily operate your account using this number, along with the password which will be provided to you in a sealed welcome kit. Also read : What Are POP Charges Under NPS?

1. Easy to Open and Access

Opening your NPS account is really easy and can be done online or offline. The process is simple and fast as we already discussed. Once you have your NPS account, accessing it is also really easy through the portal. You can contribute to your NPS account regularly without any hassle and can make changes from there as well.

2. Flexibility of Investment

Retirement savings schemes like EPF and PPF are considered fixed-income assets as they offer stable interest rates on the amounts invested. Investors who want to earn higher returns cannot do so via EPF or PPF. NPS offers the investor a range of different investment options like Government Bonds, Corporate Debt, Equity, and Alternate Investment Funds . It gives them the freedom to create their own asset mix depending on their risk profile and the overall scheme limits. As there are various assets to choose from, the returns on NPS are performance based and also market linked.

3. Better Performance

A portion of the investments made in NPS also goes towards corporate debt and equities apart from government bonds. As a result, the returns earned via NPS are usually higher than the other retirement savings schemes like EPF or PPF . However, the investments are market linked, and hence they do not offer guaranteed returns.

4. Two Accounts

Retirement saving schemes usually encourage investors to stay invested for longer periods and as a result, they have higher lock-in periods. The Tier I account in NPS is no different in this sense. You cannot withdraw the contributions made in NPS Tier I account before the age of 60. However, NPS also offers investors to open a Tier II account whereby they can invest without any withdrawal restrictions. This allows them to invest in NPS for other investment goals as well.

5. Liquidity

Regarding liquidity, the NPS scheme permits an initial withdrawal of 60% of the total amount. After the age of 60, the remaining funds can be directed towards annuity plans. Moreover, a provision allows for accessing up to 25% of the accumulated amount after a three-year contribution period to address unforeseen financial needs.

6. Low Cost

The scheme promotes affordability by mandating a minimum annual contribution of Rs. 1000/-. Additionally, a modest minimum of Rs. 500/- is stipulated for the initial account opening.

7. Hassle-Free

The scheme offers a hassle-free experience due to its online transaction capabilities. This digital approach streamlines various processes. Furthermore, it enables participants to easily track their fund performance, Net Asset Value (NAV), and contribution status through the online platform.

8. Low Minimum Investment

You can start investing in NPS for as low as ₹500 per month or ₹6000 per year. So, investors who want to start small can also invest without any restrictions.

9. Easily Portable

NPS is easily portable. Every NPS subscriber has their own PRAN which is solely linked to them. Employees need not open different accounts when they change jobs. NPS is portable across employers.

10. Taxation Benefits of NPS

One main reason why NPS is getting popular as an investment option for retirement savings is the tax benefits that it offers to investors. Let’s take a look at the tax benefits of NPS:-

1. Tax Benefits to investors for self-contribution

Employees who contribute their income towards NPS are eligible for a tax deduction of up to 10% of their basic salary + DA under Section 80 CCD (1) of the Income Tax Act within the overall limit of ₹1.5 lakhs under Section 80 CCE.Self-employed individuals who contribute towards NPS are eligible for a tax deduction of up to 20% of their gross income under Section 80 CCD (1) within the overall limit of ₹1.5 lakhs under Section 80 CCE.Individuals contributing to NPS are also eligible for a tax deduction of up to ₹50,000 under Section 80 CCD (1B) over and above the ₹1.5 lakh limit under Section 80 CCE. This means that individuals can claim a maximum of ₹2 lakhs towards tax deductions for contributions made by them in their NPS accounts. This extra ₹50,000 limit is especially available for NPS and no other retirement savings schemes.

2. Tax Benefits for employees on employer’s contribution

Employees are also eligible for a tax deduction of up to 10% of their salary (Basic + DA) for contributions made by their employer under Section 80 CCD (2). This deduction is available over and above the deductions available under Section 80 CCE. (If the central government contributes to the employee’s NPS, the employee is eligible for a tax deduction of 14%.)

3. Tax Benefits on Withdrawals

The amount withdrawn from the NPS account of the individual up to 25% of their self-contribution is eligible for tax exemption under terms and conditions specified by PFRDA under section 10(12B).Lump sum withdrawal made by the individual up to 60% of the accumulated amount in NPS once they attain the age of 60 or superannuation is tax-free under section 10(12A). On the other hand, an annuity purchased by the individual at the age of 60 or superannuation is totally tax-free under section 80 CCD (5) of the ITA. However, the regular income received from the annuity is taxable under Section 80 CCD (3).All these tax benefits make NPS an attractive investment option for individuals who want to save for their retirement and earn pension income once they retire. It is important to note that the tax benefits are available to the NPS Tier 1 account and not available for the Tier 2 account. Read more : NPS Income tax deductions under section 80CCD

Now that you know what NPS is and its features are, there is no doubt that it is an ideal option for anyone who wants to create a retirement corpus. The benefits of NPS make it an excellent choice for investors who want to start investing for their retirement. So, what are you waiting for? Get in touch with any PoP service provider or visit the eNPS portal to start investing in NPS.