What is NPS?

Posted by

A Social Security Initiative by the Central Government, National Pension Scheme (NPS) is a Pension Program, open to employees from the private, public, and other unorganized sectors barring the armed forces.

The Central Government and the Pension Fund Regulatory and Development Authority (PFRDA) are responsible for overseeing the National Pension Scheme (NPS) India- A Voluntary Long-Term Investment Plan for Retirement.

The underlying idea of the scheme is to encourage individuals to make periodic contributions to their pension account while they are still employed. The subscribers can withdraw a specified amount of the corpus after retirement. After retirement, as a holder of an NPS account, you would get the remaining sum as a monthly pension.

For anyone who works in the private sector and needs a consistent pension after retirement, the NPS scheme is of great benefit for them. The scheme has tax advantages under Sections 80C and 80CCD and is transferable between jobs and locations.

Why should I invest in NPS?

Anyone who wants to start planning for early retirement and has a low tolerance for risk should consider the NPS. It goes without saying that having a steady pension (income) throughout your golden years will be a boon, especially for those who leave private-sector employment.

A methodical investment like this can significantly impact your life after retirement. In fact, salaried individuals who desire to maximize their 80C deductions can also take this plan into consideration.

Types of NPS Accounts

Tier I and Tier II NPS accounts are the two main categories of NPS

While Tier I account is mandatory, Tier II is an optional account. The primary distinction between the accounts is that contributions made to the Tier I account are eligible for tax deductions of up to Rs 2 lakh, while contributions made to the Tier II account are not eligible for any tax advantages. It is also possible to take money out of your Tier II account early while withdrawing from your Tier I account at a premature date is prohibited.

Basically, in Tier I, employees of the Central Government are required to contribute 10% of their base pay. However, there is no maximum contribution amount and section 80C allows for a Rs. 2 lakhs tax exemption per year. This account cannot be withdrawn until retirement and maturity.

In Tier II (which is optional), investments in the scheme can be as low as Rs. 250. However, there is no upper limit on contributions, and only employees of the government are eligible to use section 80C or 80CCD to claim an annual tax exemption of Rs. 1.5 lakh. The investor may withdraw money from this account at their discretion.

Benefits of Opening an NPS Account

Good Returns on Investments- Compared to other conventional tax-saving investments like the PPF, investing in NPS delivers significantly better returns. NPS has produced annualized returns of 8% to 10%.

Risk Assessment- The cap is set at 50% for investors aged 60 and over. The risk-return relationship is stabilized in the investors' best interests, which means that the corpus is fairly safe and continues to be ineffectual against market volatility.

Option to change the Fund Manager- Investing in NPS also gives you the option to switch fund managers if you're unhappy with the fund's performance.

Equity Allocation Choice- The NPS invests in a variety of schemes, and its Scheme E invests in equities. A maximum of 50% of your investment can be put toward stocks. Investment possibilities include active choice.

Your investments' risk profile is determined automatically based on your age. For instance, your investments become more secure. You can choose the plan and divide your investments using the active choice option.

Returns on NPS

As investments are made in market-linked securities, NPS does not have a fixed rate of interest; instead, returns are determined by how well the funds have performed in the market. Through various pension funds, the contribution paid to the NPS scheme may be invested in 4 distinct asset classes, including equities, corporate bonds, government bonds and alternative assets. The performance of the stock and bond markets affects the returns provided by these pension funds.

A portion of the NPS is invested in stocks (which implies that it may not offer guaranteed returns). However, compared to other conventional tax-saving investments like the PPF, it provides returns that are higher.

This programme has been in place for more than ten years and has produced annualised returns of 9% to 12%. If you are dissatisfied with the performance of the fund, NPS also gives you the option of switching fund managers.

It has a lock-in period till retirement but permits early withdrawals under certain conditions. The ability to distribute one's investment is another benefit provided to investors under the terms of the NPS scheme. Investors have the option of investing in funds manually or automatically.

NPS Contribution by Employer

Companies that are registered under the Companies Act of 2013 as well as some other overseas businesses may make contributions to NPS on behalf of their employees. Additionally, various other companies are eligible to adopt corporate NPS funds for their employees like governmental and connected institutions, registered cooperative societies, registered partnership enterprises (LLP) and proprietary concerns.

Employers have a choice of selecting one of the eight pension fund managers or letting their staff pick their own fund manager. However, if a specific pension fund management is hired after January 2018, the change can only be made after a year.

To learn more about Investing in NPS and to open your NPS account online, connect with mastertrust today.