National Pension Scheme (NPS)

National Pension Scheme (NPS)

National Pension System (NPS) is a voluntary contribution pension scheme launched by the government. This scheme is for the people working in public, private and even the unorganized sectors, with an exception to people working in armed forces. NPS comes under Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government, launched as long term investment plan for retirement.

The scheme earlier was only launched for the Central government employees, later the scheme was launched for every citizen in the country. NPS is a good investment option for those people who want to make most of the Section 80C deductions. It is always a beneficial if you get a regular pension in your years of retirement, especially for those individuals who are working in the private sectors jobs.

Benefits and Rules

  • Returns and risk factor

One of the benefits of NPS is that, it gives higher returns than the traditional tax-saving investments like the PPF. Currently, a cap in the range of 75% to 50% exists on equity exposure for the NPS. 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-return equation in the interest of investors, 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.

  • Tax Benefits

NPS has a provision for an overall deduction of up to Rs 1.5 lakhs. Under the Section 80CCD(1) and 80CCD(2), the former covers the self-contribution and the maximum deduction one can claim under 80CCD(1) is 10% of the salary, but not more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income. The Section 80CCD (2) on the other hand, covers the employer’s contribution towards the NPS and is not available for self-employed taxpayers. Additionally, a taxpayer can claim any self-contribution (up to Rs 50,000) under Section 80CCD(1B) as NPS tax benefit. Taking the total tax benefit to 2 lakhs.

  • Withdrawal

The amount invested in the NPS can be withdrawn only after age of 60 years. Though, post your retirement you are not allowed to withdraw the whole sum, and you are compulsorily required to keep aside at least 40% of the total sum in order continue receiving a particular amount as pension. The remaining 60% is tax free as per the present norms.

  • Early Withdrawal of amount

Investing in NPS adheres you to the rule of withdrawing of amount post completion of the whole tenure. Exceptions exists, if a person has been investing for the last 3 years then he is eligible to withdraw 25% of the total sum for certain purposes such as, children’s marriage or higher studies, paying for medical treatments. A person can withdraw up to 3 times in a gap of 5 years in the entire tenure.

National Pension Scheme is one of the best retirement plans to consider if you’re a less risk taker, and want a long-term investment option which can give you a decent return in your post retirement age.

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