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NPS - National Pension Scheme Funds

By Elricho Gomes

21st May 2022

3 mins read

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Retirement is something that we’re constantly told to prepare for, and while for some, it might seem a long time away, it is necessary to plan for it regardless. Various schemes and investment plans exist to help people save up and invest for retirement benefits. National Pension Scheme (NPS) is one such scheme that enables people to invest their money to reap retirement benefits and save on taxes.

What is the National Pension Scheme (NPS)?

The National Pension Scheme is a tax-saving scheme that aims to offer financial security after retirement. It is a government initiative provided to employees in the public, private, and unorganized sectors. Due to the invested method, the system is suitable for investors with a lower risk tolerance level who wish to save for retirement. Along with these securities, the NPS offers a unique tax benefit, allowing investors to claim a tax credit of up to Rs. 2 lakh by combining Sections 80C and 80CCD.

Upon retirement, investors can take a portion of their assets and invest the rest in an annuity, which will pay them a monthly pension. Compared to other tax-saving schemes, NPS can provide higher returns while allowing investors to change fund managers if they are unhappy with the fund's performance. As a result, the investor can determine whether or not to invest in NPS based on their financial needs, cost of living and earnings, and risk tolerance.

Tier, I and Tier II accounts are available through the NPS. Tier I accounts are required and are the most basic type of NPS account. Tier-II accounts, on the other hand, are optional. Tier-II accounts are only available to Tier I members. Tier I accounts have a lock-in period until the investor reaches retirement age. Tier-II accounts also have no lock-in period and no withdrawal limitations.

Benefits of the National Pension Scheme (NPS)

NPS provides various investment options and a selection of Pension Funds (PFs) to help plan and track the growth of assets and the pension corpus. Subscribers can change from one investment option to the next or from one fund manager to the next. NPS allows for smooth portability between occupations and locations. Individual subscribers would be able to move to a new job or area without worrying about losing their savings, as with many pension programmes in India.

The Pension Fund Regulatory and Development Authority (PFRDA) regulates NPS, which has transparent investing guidelines and frequent monitoring and performance reviews by the NPS Trust. Compared to similar pension products worldwide, NPS account maintenance costs are the lowest. The price matters a lot when investing for a long-term goal like retirement because fees can eat into the corpus over 35-40 years of investment.

The pension wealth accumulates over time with a compounding effect till retirement, and because account maintenance fees are low, the subscriber's benefit from accumulated pension wealth grows over time. Salaried employees can claim a deduction on their contribution to NPS of up to 10% of the salary, while self-employed NPS subscribers can claim a tax deduction of up to 20% of their gross income or Rs. 1,50,000, whichever is less.

Returns

The earlier a subscriber invests in NPS, the better their chances of accumulating a larger retirement fund. Interest rates are expected to be between 9% and 12% in 2021, making this an attractive investment for those looking to secure their money for the future. The interest rate on a subscriber's investment is determined by the asset class selected, and the amount contributed. Because subscribers engage in inequities and loans, the National Pension Scheme's investments are subject to market fluctuations. As a result, market changes affect the returns on such investments, which are not fixed. Whether or not a person can afford the risk, he can invest in government securities, stock, or corporate bonds, depending on his preferences.

Eligibility

An NPS account can be opened by any Indian citizen, resident or non-resident, aged 18 to 65. The Reserve Bank of India (RBI) and the Foreign Exchange Management Act, 1999 (FEMA) impose regulatory obligations on NPS accounts maintained by non-resident Indians (NRIs).

Investing and saving up for the future, not only for yourself but also for your future family, is essential in one’s investing career. Being fiscally responsible and diversifying your portfolio is critical to having a financially stable life and future. Through research and analysis, you can assess whether certain investment avenues, in this case, the National Pension Scheme, are suitable for your goals and financial capabilities.

FAQs

Who is eligible for NPS?

Any individual citizen of India (both resident and Non-resident) in the age group of 18-65 years (as of the date of submission of NPS application) can join NPS.

Can one individual have multiple accounts under NPS?

No, opening multiple NPS accounts for an individual is not allowed under NPS.

Can I open a joint NPS account?

No, an NPS account can be opened only in an individual capacity and cannot be opened or operated jointly.

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