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.
3. Eligibility:
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.
9. Portability:
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.
Summarizing NPS:
- 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.