The whole process of how NPS works is very easy. There are four major components:
At 30 years of age, Nakul started his investment under NPS to avail tax benefits and create wealth for his future
Assuming rate of interest at 10%.
At 30 years of age, Nakul started investing ₹7,000 monthly in NPS Tier II for a dream Europe tour with friends, aiming for 5 lakhs.
Assuming rate of interest at 10%, at 35 Years of age, Nakul gets 5.4 lakhs which he can withdraw at any time.
Invests in 4 different asset classes based on the risk appetite and return expectations
Individuals exhibit varying preferences when it comes to decision making
Several tax benefits offered to individuals who contribute to the scheme.
Investors can claim a deduction, for contributions made to the NPS, of up to 10% of their salary (for salaried individuals) or 20% of their gross income (for self-employed individuals), subject to a maximum of Rs.1.5 lakhs in a financial year.
An additional deduction of up to Rs.50,000 can be claimed for contributions made to the NPS, over and above the limit of Rs.1.5 lakhs under Section 80 CCD(1).
Employees can invest up to 10% of basic salary and get tax deduction under Section 80 CCD(2) in addition to the tax benefits available under Sec. 80 CCE up to Rs.1.5 lakhs
Various exit options are provided to investors who have reached the age of retirement or who want to avail Pension earlier. These options include:
Upon reaching retirement, investors can withdraw up to 60% of their corpus as a lumpsum.
Investors can do partial withdrawal after completing 3 years in the system and up to 25% of their individual contribution. This facility can be availed 3 times during the entire tenure of subscription. These withdrawals are exempted from further taxation.
The individual can exit the scheme after 5 years of joining NPS. Further if the value of total corpus as the time of exit is 2.5 Lacs or less then the investor can withdraw the overall fund. However, if the investor is willing to take pension then minimum 80% of the corpus must be invested in pension plan.
Upon retirement, a portion of the investment corpus (min. 40%) is used to purchase an annuity option for the regular pension income.
Upon reaching retirement, investors can withdraw up to 60% of their corpus as a lumpsum.
Investors can do partial withdrawal after completing 3 years in the system and up to 25% of their individual contribution. This facility can be availed 3 times during the entire tenure of subscription. These withdrawals are exempted from further taxation.
The individual can exit the scheme after 5 years of joining NPS. Further if the value of total corpus as the time of exit is 2.5 Lacs or less then the investor can withdraw the overall fund. However, if the investor is willing to take pension then minimum 80% of the corpus must be invested in pension plan.
Upon retirement, a portion of the investment corpus (min. 40%) is used to purchase an annuity option for the regular pension income.
Here are some frequently asked questions about NPS.
National Pension System (NPS) is a pension scheme introduced by the Government of India for the citizens of India to provide them with a regular source of income after their retirement.
NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Custody of funds and securities is administered through centralized infrastructure controlled by NPS Trust.
NPS is a pension scheme that provides a regular source of income after retirement, while other investment options like mutual funds or fixed deposits are used for wealth creation. NPS also offers a tax-efficient way of saving for retirement.
NPS invests in a mix of assets such as equity, bonds, and alternative investments to ensure adequate returns. It also allows its investors to choose their investment mix based on their risk appetite and investment goals.
Yes, NPS investments can be partially withdrawn for specific purposes such as higher education, housing, and medical emergencies as per the prescribed rules and regulations.