National Pension Scheme (NPS) India is a long-term investment plan for retirement under the purview of the PFRDA – Pension Fund Regulatory and Development Authority and Central Government.
- What is NPS?
- Who can invest in the NPS?
- What are the features & benefits of investing in NPS?
- What are the Different types of NPS accounts?
What Is NPS (National Pension Scheme)
The National Pension Scheme is a initiative by the Government of India. This is a pension plan which can be opted by employees from the public, private and even the unorganized sectors except those from the armed forces.
Who can Invest in the NPS
Features and Benefits of NPS
- Risk Factor
As NPS invest some portion of money in equity (stock market), hence involve some amount of risk as this portion of amount may yield unpredictable returns. And the remaining portion of money is being invested in safe investment options which does not involve any risk.
Currently, there is a cap in the range of 75% to 50% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age. However, for an investor of the age 60 years and above, the cap is fixed at 50%. This stabilizes the risk, which means the corpus is somewhat safe from the equity market volatility. The earning potential of NPS is higher as compared to other fixed-income schemes.
- Return on Investment
As some portion of money invested in NPS goes to equities (this may not offer guaranteed/fixed returns). However, it yielded returns that are much higher than other traditional tax-saving investments like the PPF.
This scheme has been in started over a decade before, and so far has delivered 8% to 10% annualized returns. In NPS you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.
- Tax Saving
One can claim up to Rs.1.5 lakh for NPS (Both for self contribution as well as for the contribution of the employer). 80CCD(1) covers the self-contribution, which is a part of Section 80C. The maximum deduction one can claim under 80CCD(1) is 10% of the basic salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income.
80CCD(2) covers the employer’s NPS contribution, which is not a part of Section 80C. This benefit is not available for self-employed taxpayers.
The maximum amount eligible for deduction will be the lowest of the below
a. Actual NPS contribution by employer
b. 10% of Basic + DA c. Gross total income – You can claim any additional self contribution (up to Rs 50,000) under section 80CCD(1B) as NPS tax benefit. The scheme, therefore, allows a tax deduction of up to Rs 2 lakh in total.
- Equity Allocation Rules
The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. You can allocate a maximum of 50% of your investment to equities.
There are two options to invest in – auto choice or active choice. The auto choice decides the risk profile of your investments as per your age. For example, if you are young, then more of your money will be invested in equity. The active choice allows you to decide the scheme and to split your investments as you wanted to.
After 60 the investor cannot withdraw the entire corpus of the NPS scheme. One can withdraw maximum 60% of the total corpus. And another 40% of the corpus has to be kept with as it is to receive a regular pension from a PFRDA-registered insurance firm.