All You Need To Know About The National Pension System (NPS)7 min readReading Time: 5 minutes
The National Pension System (NPS) is a retirement scheme introduced by the Government of India to enable Indian citizens to build a retirement corpus. In this, you can make regular contributions in the scheme that would help you to earn market-linked returns and a pension income in your post-retirement life.
1. What are the features of NPS?
NPS encourages you to be proactive towards your retirement and create a long term plan for wealth accumulation. Let’s have a look at its salient features:
Ease of Investment:
Whether you are an experienced investor or a newbie, NPS investments don’t fall heavy on your pocket. The option to invest in NPS starts with contributions of as low as Rs 1000.
You can have a well-diversified NPS portfolio wherein you get to invest in a mix of equity, corporate bonds, and government debt. This allows you to earn optimum returns on your investments.
Choice of Accounts:
In NPS, you get to invest in Tier 1 and Tier 2 accounts wherein the former provides you tax benefits on your investments while the latter serves as a zero lock-in period scheme.
Choice of Fund Management:
You can choose your NPS fund manager from amongst the seven Pension Fund Managers that are enlisted by the Pension Fund Regulatory and Development Authority of India (PFRDA).
Withdrawal of Corpus at Retirement:
You are allowed to withdraw up to 60% of the accumulated corpus upon retirement that is completely tax-free. You need to purchase a pension plan with the remaining corpus to secure a regular pension thereafter.
2. Who should invest in NPS?
Any individual citizen of India, that includes both resident and Non-resident, who lies between the age of 18-60 years can invest in NPS. Overseas Citizens of India(OCI) are also eligible to join NPS.
NPS is a smart model that enables you to construct an investment plan for retirement in a systematic manner. It is in line with the fundamental principle of investing that motivates individuals to start investing from a very early age and stay invested in a committed way to enjoy greater wealth accumulation.
3. Why should you invest in NPS?
Here are some of the reasons that make NPS a go-to solution to retire rich while at the same time avail tax benefits.
Accumulate Wealth for Retirement
With NPS, you can create a corpus for retirement and secure a pension for yourself after retirement. You can withdraw up to 60% of the accumulated corpus at the age of retirement and utilise the remaining corpus to buy an annuity to receive a pension regularly.
Get Extra Tax Deduction of Rs 50,000
Your investments in NPS makes you eligible to claim an additional tax deduction of up to Rs.50,000 under section 80 CCD(1B) over and above the tax benefits of Rs. 1.5 Lakh available under section 80C.
Earn Market-linked Returns
NPS provides you an opportunity to earn market-linked returns that beat inflation and help you to accumulate a relatively larger corpus for retirement.
Enjoy the Option to Rebalance the Portfolio
Your NPS portfolio gets rebalanced once every year wherein your allocations in equity shares are shifted to debt as your age increases.
Pick a Pension Fund Manager of Your Choice
You can choose a pension fund manager based on its track record from the following seven Pension fund managers that are appointed by the PFRDA:
- ICICI Prudential Pension Fund
- LIC Pension Fund Ltd
- Kotak Mahindra Pension Fund
- SBI Pension Fund
- UTI Retirement Solutions Pension Fund
- HDFC Pension Management Company Ltd
- Birla Sunlife Pension Management Ltd.
4. What kind of benefits are available under NPS?
You get to enjoy seamless benefits under NPS that range from easy documentation to long term capital appreciation. Let’s have a look at each of them.
Open Your Account With Ease
You can open your NPS account easily and instantly with minimal KYC documentation.
Save Taxes Up To Rs.15,600
You receive an extra tax deduction of Rs.50,000 under Section 80 CCD(1B) from your taxable income. This is allowed over and above the tax deductions that you can avail under Section 80C. If you lie in the highest tax bracket, then you can save taxes as much as Rs 15,600.
Track NPS Portfolio in Real-Time
You can track your NPS portfolio returns in real-time to ensure that your portfolio is performing as per your expectations.
5. Which types of accounts are available under NPS?
NPS offers you two types of accounts i.e. Tier 1 & Tier 2.
Tier 1 account is mandatory while it is optional to invest in the Tier 2 account that acts like an add-on voluntary savings facility. You can withdraw the accumulated corpus from the Tier 1 account only at retirement or after you have completed 10 years from the date of joining, whichever is earlier. But, in the case of a Tier 2 account, you can redeem your investment as and when you need it.
For the Tier 1 account, you are required to make minimum contributions of at least Rs 1000 annually. But there are no such restrictions for a Tier 2 account.
Your investment of up to Rs 1.5 lakh in Tier 1 account qualifies for a tax deduction under Section 80 CCD (1) and you can also claim an additional deduction of Rs 50,000 under Section 80 CCD (1B). The Tier 2 account does not offer any tax benefits.
6. How does NPS fare as compared to other Tax-Saving Investments?
You may find a number of popular tax-saving avenues available under Section 80C of the Income Tax Act 1961 like five-year Fixed Deposits (FDs), Public Provident Fund (PPF) ELSS funds, National Pension System, among others. However, you need to take into account your financial goals, risk tolerance, and investment horizon to choose the right instrument.
FDs and PPF may fit the debt component of your overall investment portfolio and you may allocate some part of your portfolio towards them. But their fixed-income nature may not help to accumulate adequate wealth to beat inflation.
If you have a higher risk appetite and want to accumulate a larger corpus then your investments in ELSS Funds and NPS make more sense. It will help you to earn relatively higher market-linked returns. In addition to this, you should know that NPS has a higher lock-in period as compared to ELSS funds that have a lock-in period of 3 years. If you want to take an aggressive exposure, then you may opt for the Aggressive Life Cycle Fund in NPS that allocates as much as 75% to equities.
In case you need a much higher exposure to equities, then you may invest in ELSS Funds that allocate as high as 90% of your invested corpus towards equities. In such a scenario, the risk profile of ELSS Funds would be higher than that of NPS.
Hence, based on the above factors, you may make a decision to achieve your wealth creation and tax-saving goals.
7. How to invest in NPS on Paytm Money?
NPS is the new-age option that enables you to build a retirement corpus in a tax-efficient manner. At Paytm Money, you can invest in NPS in a simple and convenient way. Here are a few steps that you need to follow.
Step 1: Download the Paytm Money app, complete your KYC instantly, and become investment-ready within minutes.
Step 2: On the homepage of the app, tap on the ‘Invest’ button at the bottom of the screen.
Step 3: On the ‘Discover Mutual Funds’ page, tap on the ‘NPS’ icon that takes you to the NPS Funds page.
Step 4: Tap on your preferred ‘Pension Fund Manager’ followed by tapping on ‘Invest Now’.
Step 5: Submit your personal details to complete your NPS-related verification. After successful verification, you can proceed for payment.
Step 6: Ensure that you complete your e-sign within 30 days of payment. (This step is required only after 1st payment of NPS on our platform).
Disclaimer: Investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Currently, the latest version of NPS is available only for Android users. We shall soon roll it out for iOS users too.