Raising a fund for one’s retirement period is one of the most important aspects of financial planning. It not only allows individuals to carry out their expenses post retirement, but also makes their post-retirement life hassle free. For this Government of India has introduced schemes like National Pension Scheme (NPS). It seeks to provide retirement benefits to all the citizens of India from various sectors. It is regulated by Pension Fund Regulatory and Development Authority of India (PFRDA) under the PFRDA Act 2013. All the citizens of the age group 18-60 are eligible to invest in this scheme. Under this scheme, an individual can invest in various pension funds. It offers three types of funds where you can invest and earn good returns during the retirement period. A subscriber can open two accounts- Tier-1 and Tier-2. Tier-1 is the primary account and doesn’t allow premature withdrawal until the subscriber reaches the age of 60 and the Tier-2 account allows withdrawal when the subscriber needs funds. For Tier-1 account a subscriber needs to make a minimum contribution of Rs 6000 annually and for Tier-2 account a subscriber needs to make a minimum contribution of Rs 2000 annually.
FEATURES OF NPS:
- INTEREST RATE:
Some portion of the NPS goes to equities which may not offer guaranteed returns. But it offers much higher returns than other tax saving investment schemes like PPF. The rate of returns is 8-10% annually.
- RISK ASSESSMENT :
There is a 75% to 50% range of equity exposure for the National Pension Scheme. The equity portion will reduce by 2.5% every year from the year an investor turns 50 years of age.
- EQUITY ALLOCATION :
The NPS invests in equity. There are two options to invest in equities- auto choice or active choice. The auto choice decides the risk profile as per your age. The active choice allows you to decide the scheme and split your investment.
- TAX BENEFITS :
There is a deduction of upto Rs. 1.5lakhs to be claimed for NPS. The maximum deduction one can claim is 10% of the salary. For a self-employed taxpayer the deduction limit is 20% of the gross income.
- PREMATURE WITHDRAWAL :
If you continue to invest for three years you can withdraw up to 25% of funds for special occasions like weddings, higher education of your children building, repair, or buying a house. Or for your medical treatment. You can withdraw for up to three times in the entire tenure. These restrictions are for the Tier-1 accounts only.
- CHANGING THE SCHEME OR FUND MANAGER:
The NPS allows you to change the scheme or the fund manager if you are not happy with the performance. It is applicable for both Tier-1 and Tier-2 accounts.
PFRDA offers both online as well as offline means to open this account. This pension scheme is applicable for all the government employees both central and state except for those employed in armed forces. Under this scheme, 10 percent of the government employees’ salary goes to this pension scheme with an equal contribution by the government. Central government employees receive a contribution of 14 percent from the government. Also, the corporate employees admitted by their employers can utilize the benefits of this scheme. It is applicable for entities registered as per the Companies Act, under different Co-operative Acts, registered as partnership firms or LLP or if identified as a society or trust. Also all the indian citizens meeting the eligibility criteria can invest in this scheme. At the time of maturity, the subscriber may use the pension received from the scheme to buy a life annuity from a life insurance company listed under the PFRDA, or can simply withdraw a lump sum part of the pension earned. The various Life insurance companies registered with the PFRDA that offer life annuity are Life Insurance Company of India Limited, SBI Life Insurance Company Limited, ICICI Prudential Life Insurance Company Limited, Star Union Dai-Ichi Insurance Company Limited, and HDFC Standard Life Insurance Company Limited.
The scheme is an attempt towards inculcating the habit of savings amongst the indian citizens and providing them financial stability during their retirement period. It is currently one of the cheapest investment schemes available. It is a voluntary scheme for the citizens of India. It is a long-term investment plan. The minimum investment tenure for this scheme is 10 years. Hence, you get the benefit of compounding which ensures higher aggregation of funds on maturity. This scheme comes with a lot of flexibility and allows you to choose your investment options. You can also switch between different investment funds. The NPS account can be operated from anywhere in India. It helps you to achieve financial freedom after your retirement and you can be sure of receiving guaranteed returns at retirement.