What is National Pension Scheme (NPS), Benefits of NPS, Eligibility, NPS Calculator, Disadvantages & NPS Tax Benefits 1

What is National pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored retirement savings program in India. It was launched way back in 2004 with the aim of providing retirement income to all citizens of India encouraging the social security provisions. It is a must part of everyone’s retirement planning.

National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India.

Under NPS, individual savings are put in to a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in to the diversified portfolios comprising of Government Bonds, Bills, Corporate Debentures and Shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.​

At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a PFRDA empanelled Life Insurance Company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so.

Benefits of National Pension Scheme (NPS) of NPS

  • Flexible- NPS offers a range of investment options and choice of Pension Funds (PFs) for planning the growth of the investments in a reasonable manner and monitor the growth of the pension corpus. Subscribers can switch over from one investment option to another or from one fund manager to another.
  • Simple – Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. The scheme is structured into two tiers:

o    Tier-I account: This is the non-withdrawable permanent retirement account into which the regular contributions made by the subscriber are credited and invested as per the portfolio/fund manager chosen of the subscriber.

o    Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when required.

  • Portable-NPS provides seamless portability across jobs and across locations. It would provide 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.
  • Well Regulated-NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust. The account maintenance costs under NPS are the lowest as compared to similar pension products across the globe. While saving for a long-term goal such as retirement, the cost matters a lot as the charges can shave off a significant amount from the corpus over 35-40 years of investment period.
  • Dual benefit of Low Cost and Power of compounding:Till the retirement, pension wealth accumulation grows over the period of time with a compounding effect. The account maintenance charges being low, the benefit of accumulated pension wealth to the subscriber eventually become large.
  • Ease of Access: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 following eNPS portals of CRAs:  NSDL CRA, Kfintech CRA, CAMS CRA. Central Recordkeeping Agency (CRA) is required to establish an internal system that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of NPS subscribers and their assets.

Eligibility for opening NPS account

  • All Citizen Model
  • A citizen of India, whether resident or non-resident, subject to the following conditions:
  • Applicant should be between 18 – 60 years of age as on the date of submission of his/her application to the Point of Presence (POP)/ POP Service Providers (POP-SP).
  • Applicant should comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form. All the documents required for KYC compliance need to be mandatorily submitted

What is NPS Calculator? 

The National Pension Scheme Calculator helps an investor estimate the wealth gained and maturity amount of the whole investment, i.e., how much they will receive as a pension when they retire at age 60 and the monthly pension.

Features of NPS Calculator

Here are some of the salient features of the National Pension Scheme Calculator.

  • NPS calculator can be used online in a very easy and simple way.
  • NPS plan calculator helps calculate the amount of pension you will receive.
  • NPS calculator also shows the amount invested by you during the accumulation phase, NPS interest rates, returns earned, and the total amount of funds generated at maturity.
  • The NPS calculator makes the computation of maturity amount simpler.
  •   The investors of NPS scheme can check the tax exemptions available under Section 80Cof the IT Act, 1961.

Disadvantages or Cons of the NPS

The NPS scheme has its own set of cons or disadvantages when we compare it to the other investment/pension options available.

  1.  Withdrawal Limits

Along with the NPS lock-in period, withdrawals from the pension account also have restrictions. NPS restricts all kinds of withdrawals before the subscriber reaches the age of 60 years. The subscriber can make the first withdrawal from NPS after 10 years of opening the account, and a total of 3 withdrawals, till they reach the age of 60 years. The withdrawal cannot be more than the total sum of all the contributions made by the subscriber.

  1. Taxation at the Time of Withdrawal

The NPS corpus, which the subscriber can use for buying an annuity or for drawing pensions, is taxable when the schemes mature. 60% of the investment in the NPS is taxed by the Government of India, while 40% escapes taxation.

  1. Account Opening Restrictions

A person can maintain a single NPS account through an NPS CRA login in their lifetime. While the PRAN can be easily ported across geography and jobs, 1 single individual will get a single PRAN.

  1. Limited Exposure to Equities

The investment limit on equities has been confined to 75%. This may be a significant issue for individuals in their 20’s-30’s. This implies a possible loss of opportunity to get exposure to the equity markets.

  1. Mandatory Annuity

The withdrawal from Tier 1 account is restricted as it is the primary account for pension savings. At the time of maturity, one can withdraw 60% of the funds, and the remaining are used to buy an annuity. The returns of annuity are not tax exempted.

  1.   NPS Lock-in Period

Since NPS is a retirement product, the NPS lock-in period is till retirement.

  1. Complexity towards Choosing the Best NPS Fund Manager

Many people are not aware of the financial terms relating to equities, debt, securities, and others. Hence, they fail to choose the best NPS fund manager for their NPS investments.

Factors Impacting Monthly NPS Pension Amount

Traditional pension schemes such as Government pension or EPS pension had pre-defined contribution amounts and a specific formula to calculate the monthly pension post-retirement. The monthly pension from National Pension System is different because the amount accumulated in the pension account varies from one subscriber to another due to some key reasons:

  • NPS Contributions

You can choose the amount you want to invest in your NPS account subject to a minimum annual contribution of Rs. 500. There is no maximum limit on the amount that you can invest, so, you have the opportunity to accumulate a significantly larger amount by the time you retire as compared to traditional pension schemes where there is a maximum limit on the pension contribution that can be made. As a result, your monthly pension from NPS can be significantly higher as compared to the monthly pension received from traditional pension schemes.

  • Age & service left at the time of Entry

The returns will depend on the factor when one starts investment and how long one is invested into the NPS.

  • Returns earned from NPS

The Returns from NPS will depend on the asset classes you are invested in. Under NPS, your contributions are invested in 4 different asset classes – Equity, Government Securities, Corporate Bonds, and Alternative Investment Funds. What’s more, you can also select the allocation limits towards each asset class according to your risk tolerance.

Income Tax Benefits available in NPS

  1. Benefits To Individuals:
    Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)
An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

  1. Benefits under the Corporate Sector:

Corporate Subscriber:
Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer’s NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, up-to 7.5 Lakh.

Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

For more details visit the official site nps login

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