Do you worry about how to plan for a secured retirement?
Well, the National Pension Scheme (NPS) is an attractive investment scheme operated by the Government of India through the Pension Fund Regulatory & Development Authority (PFRDA).
I started my NPS journey in January 2018 for the sole purpose of tax saving. At that time, I was working full-time. Considering the benefits it offers, I decided to continue with my installments even after switching to a freelance role.
Table of Contents
- What is the National Pension Scheme?
- Is NPS Better Than PPF for Retirement Planning?
- How to Apply
- How to Contribute to Your NPS Account
- Safety Measures to Follow
- Tax Benefits
- Good News
What is the National Pension Scheme?
It was introduced to the Indian financial systems in the year 2004 for any government employee joining after January 1st, 2004. Later it was extended to all Indian citizens in 2009.
There are considerable variations in NPS benefits for government employees and others. This article focuses on the participation of non-government employees in the scheme.
Is NPS Better Than PPF for Retirement Planning?
Public Provident Fund (PPF) is another government-backed scheme belonging to the general category and not specific to retirement. It has been running since 1968 and could be considered outdated from the current economic growth point of view.
PPF is a fixed return scheme where you get a pre-decided percentage of interest on your investments. Thus, it is a low-risk scheme.
Returns from an NPS account are dependent upon the stock market positioning much like mutual fund investments. Therefore, the returns vary year on year (YOY). It is a comparably high-risk venture.
Since NPS is a long-term investment scheme and markets tend to give good returns in longer durations, it is a promising retirement planning scheme. To give you a glimpse, the YOY returns of NPS range from 9-12%.
Know Your Pension Fund Manager
Market-based schemes are operated by Fund Managers. Much similar to mutual funds, NPS offers you a choice from 10 fund managers to take care of your long-term investment through NPS if you opt for auto-choice. You can choose your preferred manager based on their past performances and trustworthiness. Additionally, you can change your fund manager once in any financial year.
(P.S. You can read more about the auto and active choices here.)
Any Indian citizen between 18-70 years of age is eligible to apply for NPS.
How to Apply
There are two options to open an NPS account.
Option 1: Online through the following link. https://enps.nsdl.com/eNPS/NationalPensionSystem.html
It is known as eNPS.
Option 2: Offline through Point of Presence (POP) appointed by the PFRDA. There is a list of 43 banks/entities authorized to open an NPS account.
How to Contribute to Your NPS Account
Option 1: In online mode, you can contribute up to Rs. 20000/- through UPI. Else you can opt for Bill desk or RazorPay where you can pay through Credit/Debit cards or Netbanking.
Option 2: In offline mode, you can contribute by cash, demand draft, or cheque at any registered POP.
Safety Measures to Follow
As with any other monetary scheme, keep the following points in your mind while benefiting from the NPS scheme:
–Make sure you keep your PRAN– Permanent Retirement Account Number and its password secured.
– keep an eye on your returns during relatively stable periods in the economy. If you feel your fund manager is not performing on par with others you may want to consider a change.
–Do not panic in case of market instabilities. Long-term investments are the least affected schemes by the volatile price actions.
It offers an additional tax benefit of up to INR 50K per year under section 80C, subsection 80CCD (1B) of the Income Tax Act. This is over and above the existing INR 1,50,000/- investment exemption.
As a person turns 60, she is eligible to withdraw 40% of the accumulated amount tax-free from her Tier I account. The remaining 40% needs to go to a taxable annuity plan. This is a good thing as you have access to a secured monthly/quarterly/yearly income through the annuity.
The remaining 20% is released upon required tax payments.
You can continue your investments for 75 years if you wish by switching to a Tier II account.
Now you can avail the benefits of NPS through Systematic Investment Plans (SIPs). This takes off the extra burden of arranging and investing a larger amount.
It also helps in utilizing the power of compounding to the fullest.
Smart investment choice is always enthralling. Make a good one now and see your money growing on a wealth tree.
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Disclaimer: This blog is written up for educational purposes only. This is not investment advice. Please consult a certified financial entity before taking any investment steps.