National Pension Scheme (NPS); Benefit & Importance
What is National Pension Scheme (NPS)?
NPS stands for National Pension System. It’s a voluntary, defined contribution retirement savings scheme designed to encourage systematic savings during an individual’s working life.
The scheme aims to promote the habit of saving for retirement among Indian citizens and provide a sustainable solution to the problem of inadequate retirement income.
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Under NPS, individuals contribute to a pension fund that’s managed by professional fund managers regulated by PFRDA.
The contributions are invested in a diversified portfolio comprising of government bonds, bills, corporate debentures, and shares, with the aim of earning high returns over time.
Upon exiting the scheme, subscribers can use their accumulated pension wealth to purchase a life annuity from a PFRDA-approved life insurance company.
They can also withdraw a portion of their pension wealth as a lump-sum if they choose to do so.
The NPS offers flexibility to subscribers to make informed decisions about their retirement planning.
Benefit’s of National Pension Scheme (NPS)
The NPS or National Pension System offers several benefits to subscribers. Here are some of the key benefits of NPS:
- Retirement savings: NPS encourages individuals to save systematically during their working life, which helps build a corpus for their retirement.
- Flexibility: Subscribers can choose their own contribution amount and frequency as per their financial goals. They can also switch between different investment options and pension fund managers.
- Tax benefits: Contributions made to NPS are eligible for tax deductions under section 80CCD(1) of the Income Tax Act, 1961, up to a maximum of Rs. 1.5 lakh per financial year. An additional deduction of up to Rs. 50,000 is available under section 80CCD(1B).
- Long-term investment: NPS invests in a diversified portfolio of assets that offer the potential for long-term growth and returns.
- Regular income in retirement: At the time of retirement, subscribers can use the accumulated pension wealth to purchase a life annuity from a PFRDA-approved life insurance company, which provides a regular income stream in retirement.
Why National Pension Scheme (NPS) is Important?
NPS or National Pension System is an important scheme because it promotes the habit of systematic retirement savings among Indian citizens and helps them plan for a secure financial future. Here are some reasons why NPS is important:
- Provides retirement income: NPS helps individuals accumulate a corpus for their retirement, which can be used to purchase a life annuity or withdraw a lump-sum at the time of retirement, providing a regular income stream.
- Promotes financial discipline: NPS encourages individuals to save regularly during their working life, which helps inculcate the habit of financial discipline.
- Offers tax benefits: Contributions made to NPS are eligible for tax deductions under section 80CCD(1) and 80CCD(1B) of the Income Tax Act, which helps in reducing the tax liability of subscribers.
- Low cost: NPS has a low cost structure compared to other retirement products, which makes it an affordable option for individuals to save for retirement.
- Transparent and regulated: NPS is regulated by PFRDA and offers complete transparency in terms of investment decisions and returns, which provides subscribers with confidence in the scheme.
Who should opt for NPS ?
NPS or National Pension System is a suitable retirement savings scheme for individuals who want to build a corpus for their retirement in a cost-effective and regulated way.
Here are some types of individuals who should consider opting for NPS:
- Salaried employees: NPS is a good retirement savings option for salaried employees who want to build a corpus for their retirement in a systematic way and avail tax benefits on their contributions.
- Self-employed individuals: NPS is also suitable for self-employed individuals such as freelancers, entrepreneurs, and professionals who don’t have access to employer-sponsored retirement plans and want to build a retirement corpus on their own.
- Young investors: NPS is a good option for young investors who have a long investment horizon and want to take advantage of compounding returns to build a sizeable retirement corpus over time.
- Risk-averse investors: NPS offers a range of investment options with varying levels of risk, which makes it suitable for risk-averse investors who want to invest in a diversified portfolio of assets with a long-term investment horizon.
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who is eligible to open an National Pension Scheme (NPS) account and how to open one:
Eligibility:
- Any citizen of India between the age of 18 and 65 years
- Non-resident Indians can also open an NPS account
Ways to open an NPS account:
- Visit the POP-SP (point of presence service provider), such as a bank branch or post office
- Open an account online through the eNPS website using PAN and bank details
PRAN:
- A PRAN (Permanent Retirement Account Number) is issued to each NPS subscriber
- In case of physical opening of the account, the person can submit the PRAN application along with KYC documents at the nearest POP-SP
- Once the PRAN is issued, a PRAN card will be sent to the correspondence address
E-NPS:
- An account can be opened online through the eNPS website by choosing the eSign option based on Aadhaar authentication
- Alternatively, one can fill up the online form by submission of necessary details, print the same, paste the latest photograph, sign and submit it to the CRA.
First contribution:
- At the time of applying for registration, the subscriber needs to make the first contribution with a minimum of Rs. 500.
Overall, the choice of retirement savings option depends on the individual’s risk appetite, investment goals, and retirement planning needs. It is advisable to consult a financial advisor before making a decision on which option to choose.
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