National Pension Scheme (NPS) is voluntary meaning a subscriber can contribute at any point of time in a Financial Year and also change the amount he wants to set aside and save every year.
NPS contributions would grow and accumulate over the years, depending on the returns earned on the investment madeUnder NPS, individual savings are pooled into a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelinesNPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust
New Delhi: Government-backed National Pension Scheme is one of the best investment option to build a retirement corpus. Administered by the Pension Fund Regulatory and Development Authority (PFRDA), it offers tax-saving benefits to the subscribers. When compared to other assets in the category, NPS stands out with a couple of lucrative features.
Note that there is no maximum limit on investment in NPS but minimum Rs 1,000 investment per annum is required to keep the NPS account active. This pension scheme is available for citizens aged 18 to 65. Subscribers are required to make at least 1 contribution per fiscal.
NPS has two accounts – Tier I and Tier II. While Tier I is the default account for tax benefit purpose, Tier II account is optional. When you open an NPS account, Tier I account is opened as default and one can avail tax benefit on Tier I investment.
Here are 5 reasons why NPS should be a part of your retirement portfolio:
1. Dual benefit of Low Cost and Power of compounding: On a global scale NPS is the cheapest pension investment product owing to economies of scale in operations of the system architecture. NPS continues to score over other products in the category due to low costs which over the long term can magnify into a huge advantage. Additionally, the accumulated corpus over the years provides great compounding benefit which leads to large corpus.
2. Flexibility: NPS Subscribers enjoy great flexibility as they can choose their own investment options and pension fund and see their money grow. Also, investment option or asset class can be switched twice a year while the Pension Fund can be changed once in a year. NPS offers you two approaches to invest in your account: Active choice and Auto choice. In Active choice, Subscriber selects the allocation percentage in assets classes, however, in Auto choice, funds are automatically allocated amongst asset classes in a pre-defined matrix, based on the age of the subscriber. After selection of pension fund manager, Subscriber also has to exercise the choice of investment.
3. Assured annuity amount: Annuity refers to the monthly payment that you will receive as a subscriber from the Annuity Service Provider (ASP) after your exit from the National Pension Scheme (NPS). For all NPS subscribers, it is compulsory to purchase an annuity product from listed ASPs at the time of superannuation and pre-mature exit. The subscriber selects the ASP at the time of submitting their withdrawal request or post the payment of Lump sum withdrawal.
The annuity amount is dependent upon the duration of annuity policy & annuity purchase amount. According to the information available on NSDL – the central record keeping Agency For National Pension System – the minimum age to receive annuity is predefined by each ASP. For example, HDFC and LIC offer the annuity from the age of 30 while SBI Life offers the annuity only after Subscriber reaches 40 years of age. The duration of the annuity policy is dependent upon the annuity scheme opted by Subscriber.
4. Tax benefits: At the time of investment, the tax-saving benefit of NPS can be claimed under three sections of the Income-tax Act.
Section 80CCD (1): Tax-benefit under section 80CCD (1) is available on an individual’s self-contributions to the NPS Tier-I account. In the existing regime, an individual can claim tax benefit on a maximum self contribution of Rs 1.5 lakh in a financial year to the Tier-I NPS account. The amount deposited up to Rs 1.5 lakh can be claimed as deduction from gross total income. Note that this deduction comes under the overall limit of section 80C of the Income Tax Act. Current income tax laws allow maximum deduction of Rs 1.5 lakh under sections 80C, 80CCC and 80CCD (1).
Section 80CCD (2): Tax benefit under 80CCD (2) can be claimed by the individual when the employer deposits the money on behalf of the individual in the NPS Tier-I account. According to the existing tax laws, the employer can deposit a maximum of 10 per cent of the individual’s salary in NPS Tier-I account. Salary here meaning basic salary plus dearness allowance (DA). There is no maximum restriction on how much can be deposited as long as it does not exceed the 10 per cent limit. The amount deposited by the employer can be claimed as deduction from gross total income before tax. The tax benefit under this section is over and above the section 80CCD (1).
Section 80CCD (1b): An individual can claim tax deduction under 80CCD (1b) for a maximum of Rs 50,000 in a financial year. This additional deduction was introduced in the financial year 2015-16. The additional tax benefit of Rs 50,000 is over and above tax-break under section 80CCD (1) and 80CCD (2).
5. Portability and online access: NPS provides seamless portability across jobs and across locations. It would provide a hassle-free arrangement for the individual subscribers while he/she shifts to the new job/location, without leaving behind the corpus build, as happens in many pension schemes in India.
The NPS account is manageable online. An NPS account can be opened through the eNPS portal. Further contributions can be also be made online through the eNPS portal. Once the PRAN account is opened, an online login id and password is provided to the subscriber. He/she can log in and view/manage his NPS account online, over a click.
NPS pension calculator:
You can easily calculate your NPS pension by using the pension calculator available on the National Pension System Trust (NPS Trust) website. All you have to do is enter your date of birth, your contribution, your expectation of return on investment, Annuity rate expectation and annuity percentage.