National Pension Scheme (NPS) is a voluntary, defined contribution pension system launched by the Government of India. It aims to provide individuals with a pension income after retirement. Here is a detailed explanation of NPS.
Explanation of National Pension Scheme (NPS) Retirement Planning:
1. NPS Objective:
The primary objective of NPS is to promote retirement savings and provide individuals with a regular income stream during their post-retirement planning years.
2. Regulatory Authority:
The Pension Fund Regulatory and Development Authority (PFRDA) regulates and supervises the NPS.
NPS is open to all citizens of India, including salaried employees, self-employed individuals, and Non-Resident Indians (NRIs) aged between 18 and 65 years.
4. Tier Structure: NPS operates through two tiers:
a. Tier 1 Account: This is the primary retirement planning account with a long-term lock-in period and certain restrictions on withdrawal. It is mandatory to open a Tier 1 account to avail tax benefits.
b. Tier 2 Account: This is an optional investment account with a shorter lock-in period and greater flexibility for withdrawals.
5. Investment Options: NPS offers two investment choices:
a. Active Choice: Under this option, subscribers can allocate their funds across various asset classes, including equity, corporate bonds, and government securities, based on their risk appetite.
b. Auto Choice: This option offers an automatic lifecycle-based portfolio where the asset allocation is determined based on the subscriber's age. It starts with a higher equity allocation and gradually shifts towards safer options as the subscriber approaches retirement Planning.
6. Pension Fund Managers (PFMs):
NPS allows subscribers to choose from multiple PFMs, which are registered with PFRDA. These PFMs manage the investment of the subscribers based on their chosen investment option.
7. Tax Benefits:
NPS provides tax benefits to individuals under different sections of the Income Tax Act:
a. Tax Deduction: Contributions made by an individual towards their NPS account are eligible for tax deductions under Section 80CCD(1) of the Income Tax Act, subject to specified limits.
b. Additional Tax Deduction: An additional tax deduction is available for contributions made towards the NPS account, up to a limit of Rs. 50,000, under Section 80CCD(1B).
c. Exempt-Exempt-Tax (EET) Framework: NPS follows the EET taxation regime, which means the contributions and accumulation are tax-exempt, but the withdrawal portion is taxable.
8. Withdrawal and Annuity Options:
On reaching the age of 60, NPS subscribers can withdraw a maximum of 60% of the accumulated corpus as a lump sum. The remaining 40% must be utilized to purchase an annuity plan from a PFRDA-approved insurance provider. The annuity provides a regular pension income to the subscriber.
NPS offers portability, allowing subscribers to shift their NPS accounts across various PFMs or change their investment options as per their preferences.
10. Online Accessibility:
NPS provides online access to subscribers for managing their accounts, checking statements, making contributions, and tracking investment performance.
- Voluntary, defined contribution pension system
- Regulated by PFRDA (Pension Fund Regulatory and Development Authority)
- Open to all Indian citizens aged 18 to 65
- Tier 1 account (mandatory) with long-term lock-in period
- Tier 2 account (optional) with shorter lock-in period and more flexibility
- Active Choice and Auto Choice investment options
- Multiple Pension Fund Managers (PFMs) to choose from
- Tax benefits under Section 80CCD(1) and Section 80CCD(1B)
- 60% lump sum withdrawal and 40% for annuity purchase at retirement
- Portability allows shifting of accounts and investment options
- Online accessibility for managing accounts and tracking performance.