National Pension System (NPS): 7 Most Important Things to Know

michealanderson August 23, 2022

The National Pension Scheme is a retirement scheme regulated by the government of India. Any citizen of India except the armed forces is eligible to invest in the NPS scheme. The NPS scheme has a minimum contribution of Rs.6,000, payable in lump sums or monthly instalments of Rs.500.

The NPS scheme invests the subscription money into market-linked instruments like debt and equity, and the returns are based on the performance of these investments. Currently, NPS is paying an interest rate of 8-10% on your contribution. Under the PFRDA, a National Pension Scheme matures at 60 but can be extended to 70 in certain circumstances.

Listed below are seven of the most important things you should know about the National Pension Scheme

Returns and interest

NPS contributions are invested in equities, which offer higher returns than traditional tax-saving investments, such as PPFs. Therefore, it is recommended that individuals interested in accumulating funds in the long run and who wish to live a financially stable life after retirement should consider this plan which offers an interest rate of 9%-12%. Investment in NPS scheme is better than fixed deposit schemes. However, returns in the NPS scheme cannot be calculated in advance in the same way they can be calculated using the FD interest calculator India in the cases of FDs.

Tax benefits for NPS

It is one of the benefits that is offered to individuals as part of their NPS scheme. Under Section 80C of the Income Tax Act, contributions made to the NPS scheme up to Rs.1.5 lakhs are exempt from tax. A further feature of the National Pension Scheme is that both the employer and the employee contribute to the scheme and are eligible for the tax deduction.

Rules regarding premature withdrawals and exits

There is a requirement to invest in the National Pension Scheme until you reach the age of 60 years. It is possible to withdraw a portion of the amount from National Pension Scheme within three years of opening. There is a limit of only 25% of the total contribution that subscribers can withdraw. It is only permissible to withdraw money prematurely in situations such as sponsoring a child’s education, buying a house, or in an emergency where medical conditions arise. In the whole period of the subscription, subscribers have the right to withdraw up to three times in intervals of five years. The rules apply only to Tier I accounts and not Tier II accounts.

Rules for withdrawals after 60 days

The National Pension Scheme does not allow the individual to withdraw the entire accumulated funds after retirement. Annuities from PFRDA-registered insurance firms must be paid at least 40% of the accumulated funds in this scheme. Among the funds accumulated over the years, 60% are not subject to taxation.

Rules for allocating equity

National Pension Scheme is a retirement investment scheme that helps secure your retirement. According to the equity allocation rule, investors can allocate 50% of their equity investment. There are two types of investments available to investors, active choice and auto choice. In active choice, investors can select their funds and split the investment according to their risk appetite and suitability. In contrast, their risk profile and age are considered in auto choice.

Assessment of risks

A cap of 75% to 50% applies to equity exposures under the National Pension Scheme. In the case of government employees, this cap is 50%. Starting from the year the investors turn 50, the equity portion will decrease by 2.5% yearly. The equation of risk-return protects investors from the volatility of the equity market. As a result, there is a higher earning potential with this scheme when compared to other fixed-income schemes.

Offers a wide range of options

A National Pension Scheme offers subscribers flexibility because you have the option of selecting investments and pension funds and watching their savings grow over time. In addition, the NPS scheme allows subscribers to contribute at any point during a financial year and adjust the amount they want to invest yearly.

Conclusion

NPS scheme is regulated by a pension fund regulatory and development authority in India, also called PFRDA. The National Pension Scheme is transparent and reliable because it regularly monitors investments and maintains transparent investment policies.

If you want to live a happy and stress-free life after retirement, you should invest as much money into a retirement plan. The benefit of a retirement policy is the possibility of making the most of the golden period of your life by taking advantage of the accumulated corpus within it.