The National Pension Scheme (NPS)is a reliable and safe investment vehicle which is available to all citizens of India between the age group of 18 and 65 years. Investing in the NPS means that your contributions will be invested in different market linked instruments like debts and equities. The final pension amount is contingent upon the performance of these investments. You must remember that the earning potential of the NPS is higher than other fixed income schemes.
What is the NPS?
Implemented on May 1, 2009, the National Pension Scheme (NPS) is a government-sponsored pension scheme. NPS, a social security scheme of the government, is open to all employees of the public, private and unorganized sector. The only exception being the personnel from armed forces, who are ineligible to participate in the scheme. It encourages people from all the three sectors to invest in their pension account at regular intervals. After retirement, the subscriber can withdraw a certain amount from the corpus, and avail the remaining amount as monthly pensions. The National Pension Scheme is based on unique Permanent Retirement Account Number (PRAN) which is allotted to every subscriber for NPS. The scheme is regulated and managed by the Pension Fund Regulatory and Development Authority (PFRDA).
How does the NPS work?
Upon joining, you are allotted a Permanent Retirement Account Number (PRAN). All your contributions towards the National Pension Scheme are made directly through the employer that you work for. At retirement or during exit from the scheme, this corpus of funds is made available to you. But it isn’t made available in its entirety. You are required to redirect some amount from this corpus to be invested in an annuity scheme. This portion will then serve as a
monthly pension which is provided to you, post-retirement.
Types of NPS accounts:
Under the scheme, two sub-accounts, Tier-I and Tier-II, are provided. Tier-I account is mandatory, besides being a non-withdrawable retirement account. You can withdraw the amount only after meeting the prescribed exit conditions under the NPS. On the other hand, Tier-II is a voluntary savings facility available as an add-on to the Tier-I account. You are free to withdraw your savings from this account.
Note: Swavalamban Scheme was a scheme by the union government in 2010-2011 to bring workers of the unorganized sector within the ambit of NPS. It has now been subsumed within the Atal Pension Yojana of 2015-2016.
How to invest in the NPS: NPS offers a range of investment options along with the choice of Pension Fund Managers (PFMs). If you are an active investor, you can plan the growth of your investment in alignment with your goals. You can also switch from one investment option to another, as your returns are completely market-related.
When investing in the NPS, you have two choices of investments, the Active Mode and the Auto Mode. In the Active mode, you have to manage the assets by splitting the investments. You can split the investments in four categories, Class E, which invests in equity, Class C, which invests in corporate bonds, Class G, which invests in Government bonds and Class A, which invests in alternative assets. You need to provide the pension fund manager with the asset allocation matrix and percentage allocation for each of the asset classes. You must remember that allocation in equities should be within the range of 50% to 75%, depending upon the terms of the policy document. The contribution towards alternative assets also cannot be more than 5%. In Auto mode, you do not need to manage your investments. Here, the asset allocation is automatically rebalanced as you grow older.
Benefits of investing in the NPS:
- Higher returns: A key benefit of the NPS is that the returns are much higher than traditional tax-saving investments like the PPF. Over the years NPS has provided annual returns ranging from 8% to 10%.
- Safe from market volatility: As there is a cap between 50% and 75% on equity exposure. Investing in the NPS is safe from the equity market volatility. It is safer than other aggressive investment instruments.
- Tax Benefits: A key benefit of the NPS is that it is an efficient tax saving instrument. You can claim a deduction upto Rs 1.5 lakh for your contribution as well as the contribution of the employer under Sections 80 CCD(1) and 80 CCD(2) of the Income Tax Act. You can consider investing in the NPS on Finserv MARKETS, which also provides you the option of claiming additional self contribution, up to a maximum of Rs 50,000, as NPS tax benefit under Section 80 CCD(1B) of the Income Tax Act.
- Flexibility in managing your contributions: You can not only manage your asset allocation while investing in the NPS, but also avail of the option of changing the pension scheme or the fund manager. This benefit of the NPS is available both for Tier I and Tier II accounts. On Finserv MARKETS, you have the flexibility of choice both in selecting the investment option as well as fund managers. You can also switch between different investment options and fund managers.
Thus, the NPS is a safe investment vehicle, which also provides you higher returns than traditional tax-saving instruments and other fixed income schemes. You can consider investing in the NPS if the benefits are commensurate with your risk appetite and financial goals. You can avail of the National Pension Scheme on Finserv MARKETS, which provides 100% transparency with no hidden costs. You do not require to visit a branch as the entire process is online. Along with the hassle-free subscription process, you can say goodbye to the tedious paperwork as you can simply upload the requisite documents online for opening an account. You also have the flexibility of selecting income distribution on Finserv MARKETS, with the option of both Auto and Active choice for making investments. You can also access your online account from anywhere.
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