National Pension System, or NPS, is a retirement savings option where individuals can contribute a monthly amount to draw out a regular income after retirement. It is a government sponsored pension scheme which was started in January 2004 for government employees. Later, in 2009, it was opened to all classes. Here are the basic details to know about the scheme:
What is National Pension System?
NPS is a pension-cum-investment scheme launched by the Government of India to provide old age security to the citizens of India. It brings an attractive long-term savings opportunity to effectively plan your retirement through safe and regulated market-based returns.
The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). National Pension System Trust (NPST) set up by PFRDA is the registered owner of all properties under NPS.
NPS: Features and Benefits
NPS can be broadly classified into two categories – government employees and other individuals. All employees of Central Autonomous Bodies who have joined on or after January 1, 2004, compulsorily come under the government sector of NPS, while any other person is allowed to voluntarily join NPS with effect from May 1, 2009. Any Indian citizen between 18 to 60 years can join NPS.
Under NPS, individuals are allowed to choose or change POPs (Point of Presence), investment patterns and entities known as fund managers. This ensures that one can optimize returns as per his convenience with various asset classes (equities, corporate bonds, government securities and alternative assets) and fund managers.
There are two types of NPS accounts – Tier 1 and Tier 2. Tier 1 account is primarily meant for retirement savings, where one has to create an account. minimum contribution 500 at the time of opening the account. it also includes tax benefits Under section 80CCD(1B) of the Income Tax Act, 1961.
Under NPS Tier 1, a person is allowed to withdraw 60 per cent of the accumulated corpus accumulated during his working years at the time of retirement, which is tax-free. The remaining 40 percent is converted into an annual product.
NPS Tier 2 is an open-access account with a minimum investment of Rs 1,000, where the subscriber is free to withdraw his entire amount at any point of time. No tax benefit is available in this account.
NPS Contribution: Rough Calculation
If a person joins this scheme at the age of 25 and starts contributing Rs.5,000 per month. The total contribution till the time of retirement will be Rs 21 lakh. Given the expectation of 10 per cent annualized return, the total investment will increase to Rs 1.87 crore. Now, if the subscriber converts 65 per cent of the corpus into annuity, the value will be Rs 1.22 crore. Assuming an annuity rate of 10 per cent, the monthly pension can be Rs 1 lakh in addition to a lump sum amount of about Rs 65 lakh.
How is it different from old pension scheme?
The government’s old pension scheme, called Defined Benefit Pension System (DBPS), is based on the last salary drawn by the employee. NPS is referred to as the Defined Contribution Pension System (DCPS), in which employers and employees contribute to build up the pension wealth payable at the time of retirement by way of annuity/lump-sum withdrawal as per norms.
Under OPS, the employee can withdraw 50 per cent of the last drawn salary as pension after retirement.
Under NPS, a person is allowed to withdraw 60 per cent of the accumulated corpus accumulated during his working years at the time of retirement, which is tax-free. The remaining 40 per cent is converted into an annual product, which can currently provide the individual with a pension of 35 per cent of his last drawn salary.
To make NPS more attractive than OPS, The government is considering increasing As per the recent reports, the annual amount under NPS is 60 per cent, which can be 45 per cent of the previous salary. The 5 per cent gap can be bridged by the concerned government by contributing a little more to the NPS.
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