National Pension Scheme

The National Pension Scheme

The National Pension Scheme is a voluntary, defined contribution retirement savings scheme introduced by the Government of India to provide financial security during retirement. Initially launched for government employees in 2004, it was extended to all Indian citizens, including those in the unorganised sector, in 2009. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and offers individuals the opportunity to systematically save for their retirement years. The National Pension Schemeaims to provide financial security and stability during old age when people have limited income-earning capabilities. As a defined contribution pension system, the National Pension System allows subscribers to contribute regularly during their working years to build a retirement corpus that can provide a steady income after retirement.

Objectives of the National Pension System 

 The NPS full form stands for the National Pension System, although it is popularly known as the National Pension Scheme. The chief objectives of the NPS Scheme are listed below: · Promote retirement savings: Encourage individuals to build a retirement corpus with the help of regular contributions. · Provide pension income: Ensure a steady income stream for individuals during their retirement years. · Financial independence: Reduce dependency on family or state support by fostering financial self-reliance among retirees. · Expand pension coverage: Extend pension benefits to workers in the unorganised sector and self-employed individuals.

How does NPS work? The NPS operates on a defined contribution basis, where individuals contribute regularly to their NPS accounts during their working years. These contributions are invested in a mix of asset classes, including equities, corporate bonds and government securities and alternative investments, managed by professional pension fund managers. Upon reaching the age of 60, subscribers can withdraw up to 60% of the total corpus as a lump sum, which is tax-free. The remaining 40% is utilized to purchase an annuity, providing a regular pension income during retirement.​ Apart from investing in mutual funds directly, investors can consider NPS to build a robust retirement corpus

Features and benefits of NPS As an investor, you must understand the following features and benefits of NPS before opting for this investment avenue: 1. Voluntary participation: Open to all Indian citizens aged 18 to 70 years, allowing flexibility in joining and contributing.​ 2. Flexible contributions: Subscribers can decide their contribution amount and frequency, with a minimum annual contribution of ₹1,000 for Tier I accounts.​ 3. Diversified investment options: Subscribers can choose between auto and active investment options, allowing flexibility in fund allocation. The auto option adjusts investments based on age, while the active option lets investors decide asset allocation, making it ideal for those familiar with stock market basics. 4. Market-linked returns: Investments are subject to market performance, potentially offering higher returns compared to traditional fixed-income instruments.​ 5. Portability: NPS accounts are portable across jobs and locations, ensuring continuity in retirement planning.​ 6. Regulated framework: Governed by the PFRDA, ensuring transparency, reliability, and protection of subscriber interests.​ 7. Low-cost structure: The National Pension Scheme has one of the lowest fund management charges in the financial industry. 8. Tax Benefits: Contributions to NPS enjoy tax benefits under various sections of the Income Tax Act. Furthermore, NPS falls under the EEE (Exempt-Exempt-Exempt) category, meaning investments (up to the specified threshold), returns, and withdrawals (up to 60% of the corpus) are tax-free. 9. Partial Withdrawals: The National Pension System allows partial withdrawals before retirement for specific purposes such as higher education, medical emergencies, home purchase, or marriage, subject to eligibility and withdrawal limits set by PFRDA regulations.

Eligibility criteria for NPS To open an NPS account, investors must meet the following eligibility criteria: · Age requirement: Individuals between 18 and 70 years of age are eligible to join the NPS. · Citizenship: Both resident and non-resident Indians (NRIs) as well as OCIs can participate in the scheme. · KYC compliance: Subscribers must comply with Know Your Customer (KYC) norms, providing necessary identification and address proof during registration. · Employment Type: Available to salaried employees (government and private sector) and self-employed individuals. NPS is mandatory for central government employees (except armed forces) who joined on or after January 1, 2004. Note: Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) are not eligible for the National Pension Scheme.

How to open an NPS account? Now that you know what is NPS and what are the eligibility requirements for investors, you can easily open an NPS account. Opening a National Pension System (NPS) account is simple and can be done through both offline and online channels. While the offline method involves visiting a financial institution, the online process offers a seamless digital experience. Offline process For those who prefer a physical application, the following steps need to be completed at a Point of Presence (PoP) such as banks or financial institutions: · Obtain the registration form and fill in the required details. · Submit KYC documents, including identity and address proof. · Make an initial contribution (minimum ₹500 for Tier I). · Receive PRAN, a unique Permanent Retirement Account Number, upon successful registration. Online process The eNPS portal allows users to register digitally with a quick and hassle-free process: · Visit the official NPS Trust website and access the online registration form. · Complete KYC verification using Aadhaar, PAN, or bank details. · Select fund preferences, including pension fund manager and investment options. · Make the initial contribution through net banking or card payment. · Receive PRAN instantly upon successful registration.