Old age is the time to relax and enjoy life. Planning for a peaceful and joyful retirement is a smart move that you make when you are young. There are several saving schemes and insurance plans that can help you save money for old age. National Pension System (NPS) is one of the saving schemes that offers several benefits. NPS subscribers can avail an additional tax benefit of Rs. 50,000 under section 80CCD(1B) of the Income Tax Act. Are you interested to know more about the saving scheme? Read on!

Who can invest in National Pension System?

All resident and non-resident Indians who are between the ages of 18 to 65 years can open National Pension System through any one of the POPs (Point of Presence) or online at the official website of eNPS. The investment amount matures when you turn 65 years old, but it can be extended till you are 70. The person who opens the saving scheme must comply with the Know Your Customer (KYC) norms.

Upon successful enrolment for the plan, a unique Permanent Retirement Account Number (PRAN) will be created and sent to the subscriber through an SMS or email. After the receiving the PRAN, the subscriber can start investing in the scheme to build a corpus for retirement. Up to 60% of the corpus can be withdrawn upon maturity,  and the rest of the amount is paid as annuity i.e. monthly pension post retirement.

Features and Benefits of National Pension System

The scheme was initially designed for the government employees and later it was opened to all Indian residents in 2009. It is regulated by Pension Fund Regulatory and Development Authority. Following are the features and benefits of the scheme in detail:

Tenure: There is no defined tenure in this scheme wherein you can start investing once you turn 18 and until you reach 65 years old.

Investment Method: There are two types of National Pension System, namely Tier I and Tier II under which one can make the investment based on their convenience.

Tier I: Premature withdrawals are restricted under this scheme. The subscribers get an additional tax benefit for up to Rs. 50,000 under section 80CCD(1B) over and above tax benefit of Rs. 1.5 lakhs under section 80C of the Income Tax Act.

Tier II: The rules are different for this scheme. Subscribers can make withdrawals after 3 years of investment. No tax benefits can be claimed under this scheme as withdrawal is allowed. If the subscriber has not made any investment since opening the account, it will be deactivated as per the process.

You can start the scheme with the minimum investment of Rs. 500, and thereafter in multiples of Rs. 500 or more than that. Deposits less than Rs. 500 is not allowed under this scheme. Under Tier I, there should be minimum deposit of Rs. 1000 per year. There is no ceiling on the maximum amount and number of times to be deposited.

Additional Reading: Investments with Tax Benefits

Subscribers can choose the following type of investment methods:

  • Auto Choice

  • Active Choice

In auto choice, the investment is allocated equally across equity, corporate bonds, government bonds, etc. In active choice, the subscriber can choose the allocation percentage in each category.

The individuals cannot have multiple accounts. You can open one account per one name. However, you can open another pension scheme under Atal Pension Yojana.

Interest Rate: The interest rate on National Pension System depends on the market situations as the investment is linked to market performance. At the time of opening the account, the subscriber needs to choose one fund house out of 7 fund houses to manage savings scheme. If you fail to choose any one of them, SBI Pension Funds Private Limited will become your default fund manager. The interest rates will depend on how the fund house manages your account.

Tax Benefits: Only Tier I option under NPS gives you tax benefits for up to Rs. 2 Lakhs and you cannot claim any tax deduction under Tier II. The 60% of the corpus created can be withdrawn at the maturity which is completely tax-free. The remaining 40% amount needs to be used for annuity. If the subscriber wishes to withdraw, it can be done by paying tax to the amount to be withdrawn. As the returns in NPS is market linked, the interest income is exempted from tax.

Withdrawal Process: When the subscriber reaches the age of 65 years, withdrawal can be made for up to 60% of the corpus. The rest is used for annuity. However, if the total corpus is only Rs. 2 Lakhs, 100% of the withdrawal can be made.

You can make a premature withdrawal on National Pension System. In premature exit, only 20% of the sum invested is provided to the subscriber while the rest is allocated for annuity. However, premature withdrawal can be made only after 10 years. Partial withdrawals can be made after completing 3 years. Only 25% of the invested amount will be allowed for partial withdrawal. If the subscriber dies before completing the tenure, the 100% of the sum is paid to the nominee or the legal hair.

Subscribers can initiate online withdrawal through the official website of eNPS or submit a physical form at Point of Presence corner. After the account details are verified and eligibility is checked, the claim will be processed for approval. Based on the approval, the amount will be credited to your bank account.

Investing early in an NPS is recommended as it can build a huge corpus that can be used while you need support during the retirement. With its annuity plan, National Pension System ensures that you are adequately covered during your old age. Startly early and reap the benefits in multiple folds.

Additional Reading: 5 Personal Loans for Pensioners