Everything You Need to Know About National Pension Scheme

The NPS (National Pension Scheme) is a government initiative offered to employees in the public, private, and unorganized sectors. Previously, only government personnel were eligible for this program. It now allows all Indian nationals to participate in a voluntary program.

An investor can invest at regular intervals during his or her employment. In addition, it allows an investor to withdraw a portion of the collected funds after retirement while the remainder is invested in an annuity. Following retirement, the investor receives the leftover money as a monthly pension. Furthermore, tax benefits of up to Rs 1.5 lakh under section 80C and up to Rs 50,000 under section 80CCD are available to investors who invest in NPS.

How does NPS work?

NPS is a retirement investment option that allows Indian citizens (both residents and non-residents) to invest a set amount of money in their retirement account regularly. It is also a secure and long-term investment choice that allows investors to profit from market returns.

When an investor chooses to invest in the NPS, they are assigned a Permanent Retirement Account Number (PRAN).

The NPS subscriber can now donate to the NPS scheme regularly until they reach retirement age. When the investor retires, he or she can take a lump-sum withdrawal of a portion of the funds. The remaining funds will be used to purchase an annuity plan.

The monthly payout received by an NPS subscriber from an Annuity Service Provider is known as an annuity (ASP). A licensed insurance provider is an annuity service provider.

Furthermore, to provide Annuity services to NPS Subscribers, the annuity service provider must be accredited by PFRDA. In addition, investors have a variety of annuity options to choose from. For example, a life annuity and a life annuity with a refund of the purchase price on death.

NPS Employer Contribution

Employers can donate to their employees’ NPS accounts as well. Government agencies are required to contribute to their employees’ NPS accounts. While it is voluntary in the case of corporations, it is mandatory in the case of individuals (unless specified otherwise). Section 80CCD(2) allows you to deduct an additional 10% of your basic + DA income, regardless of the amount. This is in addition to the general limit of INR 1,50,000 imposed under Section 80CCE. Simply put, you can take advantage of additional tax benefits on your employer’s co-contribution (10 per cent of your salary).

NPS Benefits in India

The National Pension Scheme (NPS) is a suitable retirement option for someone who seeks a steady income stream after retirement while also saving money on taxes. The danger is also reduced because the system is regulated by the central government. Risk, on the other hand, is determined by an individual’s earnings and cost of living. Furthermore, it varies depending on how much risk an investor is willing to assume in light of his or her revenues and expenses.

Particularly for private and unorganized sector employees, systematic investment in the National Pension Scheme while employment leads to a systematic and regular source of income after retirement.

What are the disadvantages of NPS?

When compared to alternative investing and pension-related options, the NPS (National Pension Scheme) has some drawbacks. The following are some of the drawbacks of investing in the NPS plan.

No pension or annuity

The most common misconception regarding NPS is that it will pay a monthly pension when the member retires. However, this plan aids in the accumulation of a retirement fund. The subscriber can use this fund to purchase an annuity or a pension plan.

Tax implications

Even though NPS investments are tax-free under Section 80C, the corpus accumulated at the time of retirement is taxable. Once the subscriber achieves the age of 60, he can take 60% of his investment from the whole corpus. This sum is exempt from taxation. The remaining 40% of the investment is utilised to purchase an annuity, which provides the investor with a taxable monthly pension.

Restriction on withdrawal

If an investor contributes to the NPS account for three years, he or she can withdraw just 25% of the total money. Furthermore, until they reach the age of 60, the investor can only withdraw three times. There must also be a 5-year gap between the current and previous withdrawals. Withdrawals are also permitted for certain events such as a child’s marriage, higher education, the purchase of a new home, or medical care for oneself or a family member.

No guaranteed returns

The performance of the underlying security, such as corporate bonds, government securities, and stock, determines the total return of the NPS programme. As a result, market changes may have an impact on the funds’ return.