Written by : DG Gupta

A financial professional, qualified Chartered Accountants and Company Secretary examinations and enriched with experience of all types of accounting, taxation and compliance of Manufacturing as well as Service Industries

What is National Pension Scheme? Benefits of NPS

DG Gupta
DG Gupta, CA, CS

Oct 24, 2021 03:44

Planning your financial future is essential. It would be desirable if you had the necessary financial security by the time you retire. The government thus provides a National Pension Scheme, by which you can secure your as well as your family's future. In this article, let's dig deeper into NPS. What is it? How can you be eligible for it? The types of NPS accounts, benefits of an NPS account, and lastly, how can it help you save on your income tax? Let's begin with these critical points!

What is NPS?

National Pension Scheme or NPS is a government-approved pension scheme that allows individuals to secure their future safely. It often refers to as National Pension System. This government-sponsored plan was launched in 2004 by the PFRDA (Pension Fund Regulatory and Development Authority of India).

In this scheme, the subscriber or applicant can make a regular contribution to the NPS account when working and then receive the benefits from this contribution after their retirement. This scheme is for any employee working in the public or private sector, organized or unorganized sector, or any service except for the army servicemen. You can apply for an NPS account and enjoy the benefits of this post your retirement.

All the contribution to your NPS account is invested in the market by the authorities. The sum gets primarily invested in debt or equity. You get the benefit of the returns from these investments. It is mostly between 8 - 10 percent of your total contribution. You are eligible to withdraw a pre-determined percentage from your contribution in case of emergency. This will depend on the type of NPS account you have. Here are the two types of NPS accounts.

Types of NPS

There are generally two types or classes of NPS accounts:
These two differ in terms of the withdrawal amount.

1. Tier I account:

This one has a limitation on withdrawal. It is a basic pension account. Before the age of 60, you cannot withdraw 75% of the amount. You have to use this 75% to buy the annuity from the life insurer. You can only withdraw 25% of the amount from the NPS till the age of 60.
Further, once you cross the 60 age mark, you are eligible to withdraw 60% of the contribution. And you must contribute the remaining 40% to buy the annuity from the life insurer.

An annuity is a series of fixed payments that an insurer pays at a fixed interval of time until his death or the plans' maturity.

2. Tier-II account:

This type of account has no limit on withdrawal. It is a voluntary savings account. There is no compliance for an annuity or life insurance.

You can choose the NPS account type according to your preference and eligibility.

Eligibility Criteria for NPS

For you to open an NPS account, here are a few things that you must adhere to-

  • You should be a minimum of 18 years of age, and the maximum age for applying for an NPS account is 65 years.
  • You also have to be an Indian citizen.
  • You shouldn't have an already existing NPS account
  • Lastly, you also must be KYC compliant.

If you comply with all these, then you can apply for an NPS account.

Benefits of NPS

Having an NPS account has a ton of advantages. Here are a few of the most significant ones-

Returns on the contribution:

As mentioned before, a portion of your contribution to your NPS account is invested in equity capital. It yields returns on the amount. Now, there are chances that these may or may not generate high returns, but these are surely higher than other available options, for example, PPF. On average, this scheme can give you an annual return of up to 8-10% of your total contribution. This return is higher than most other schemes. Also, if you are unhappy with the returns on your contribution, then you can also ask to change your fund manager.

Risk Assessment:

Now, as you get older, your risk handling capacity reduces. With the National Pension Scheme, your risk assessment gets done beforehand. You are protected against any risk till you attain the age of 50.

Easy early withdrawal and exit rules:

The best feature of this pension scheme is that you can withdraw a certain fixed percentage of the contribution before you reach your retirement age. In the Tier-I account, it is up to 25 percent. It is possible in case of an emergency. This factor could be medical case death, buying or building a house, or education of any family member. After 60 years of age, you are then eligible to withdraw up to 60% of the contribution.

Option to change the scheme or your Fund manager:

If you are unhappy with your returns or the scheme, then you have an option to change it. You can manage it your way.

The contribution amount is as per your convenience:

With the National Pension scheme, you have the right to choose your contribution. You can pay a fixed amount, or you can increase or decrease it according to your preference.

You can choose your preferred investment avenues:

With NPS, you possess the flexibility to choose the desired form of investment. You can contribute and see your investment grow.

Safeguard your future by investing in NPS seamlessly with the backing of Gotaxfile!

Now, if you are willing to secure your future, you are at the right place. Gotaxfile is an online platform that can help you with your finances and personal investment. If you are willing to apply for an NPS, you can leave the application and management worries to Gotaxlife. We can help manage all your regulatory and financial troubles. It is one of the exclusive services that our company offers. With just one sign-up of Gotaxfile, you can access finance gurus and mentors who will help you reach your financial goals and guide you along the way. Be it filing the income tax returns or bookkeeping, or forming a company, Gotaxfile got you covered.

DG Gupta
DG Gupta, CA, CS

Oct 24, 2021 03:44

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