Understanding the National Pension Scheme: Eligibility, Features, and Advantages

After a certain age, one’s ability and scope of earning start declining, and one starts living on one’s savings. To secure one’s old age, one must take conscious steps to plan one’s retirement. Traditional pension plans are not enough to sustain a comfortable lifestyle post-retirement.

Hence, individuals are seeking better and more reliable options to build their retirement corpus. One such option is the National Pension System! It is one such solution that would encourage individuals to save systematically for retirement. So, let’s understand what is NPS scheme, and discuss its features and benefits.

What is the NPS Scheme?

The National Pension System scheme is a central government-initiated investment plan aimed at instilling the habit of saving among Indian citizens for their retirement. This low-cost pension scheme is supervised by the Pension Fund Regulatory and Development Authority of India.

The NPS is solely a retirement pension scheme that ensures a steady income accompanied by tax benefits post-retirement. According to the scheme, people are advised to invest regularly in a pension account during their employment period.

Post retirement, pension holders can withdraw a portion of the entire pension amount. The remaining amount will be credited to their bank account monthly as a pension.

Eligibility Criteria for National Pension System

NPS is an inclusive pension plan that allows a diverse group of individuals to join the scheme. However, different NPS models have different eligibility criteria that one must meet to avail of this scheme. They are:

1. The Government Sector NPS Model

Both central and state government employees, except the ones from the armed forces
Central Government or Central Autonomous Bodies (CABs) employees who were hired on or after January 1, 2004
State Government or Union Territory employees who adopted the NPS plan
State Autonomous Bodies (SAB) employees who have joined NPS

2. The Corporate Model

If the company has joined the NPS plan
The corporate employees are citizens of India – residents/ non-residents of India (NRIs)/ Overseas citizens of India
Age should be between 18-70 years
Must meet the KYC (Know Your Customer) norms as mentioned in the NPS registration form

3. All Citizen Model

Every citizen of India, irrespective of residents, non-resident or overseas citizens of India and not a part of any of the above-mentioned sectors, is eligible for an NPS account based on the following criteria:

Age should be between 18-70 years on the NPS application’s submission date
Must meet KYC norms mentioned on the Subscriber Form (SRF), and submit the required KYC documents

What are the Features of the National Pension System?

NPS offers a host of features, as discussed below, that entitle investors to save confidently for retirement:

1. PFRDA Regulated

The Pension Fund Regulatory and Development Authority (PFRDA), a government body, controls the NPS model. It monitors pension fund companies and managers so that they follow the exact guidelines formed by the NPS Trust and maintain transparency of policies with investors. Thus, it protects investors from any potential financial risks.

2. Flexible Investment Plan

As an NPS account holder, you get the flexibility to change your pension fund manager, contribution amount, investment frequency, and more.

There’s no fixed amount for investing in NPS. You can start by contributing to your account with a minimum of ₹1000. However, you must deposit the minimum amount annually to keep your account active.

NPS also allows you to change the pension plan or the fund manager if you’re not satisfied with it. This option is available to both Tier I and Tier II account holders.

3. Two-Tiered Account Structure

The National Pension System offers systematic investment plans through two different types of accounts: Tier I accounts and Tier II accounts.

Tier I Account: It operates as a mandatory primary pension account for all NPS account holders. It has a lock-in period that restricts the withdrawal of money from the account until retirement (60 years of age). With a minimum deposit of₹500, you can easily open this account.
Tier II Account: This is a voluntary savings account with more flexibility in terms of withdrawals. There is no lock-in period, and account holders can access their funds and withdraw money at any time.

4. Easy Portability

NPS offers seamless portability across jobs and locations. The modern workforce is dynamic and mobile. So, while changing your job or relocating to a new city, your NPS account remains portable. It ensures that irrespective of your employment status, you can still continue with your same NPS scheme and fund manager.

National Pension System Benefits

The NPS scheme is loaded with benefits, which has elevated its popularity compared to other traditional pension plans. Let’s check out some of the premium benefits enjoyed by the NPS subscribers:

1. Tax Saving

Tax saving is one of the most lucrative benefits of NPS, which is different for various sections of the Income Tax Act as follows:

Section 80CCD(1): You can claim tax deductions up to ₹1.5 lakh
Section 80CCD(1B): An extra deduction of ₹50,000 for NPS contributions by salaried individuals.
Section 80CCD(2): Employer contributions up to 14% of salary are deductible without any monetary limit.
80CCD(5): Annuities at the age of 60 are eligible for tax exemption.

2. Higher ROI

Money contributed to an NPS account is invested in various asset classes like equity, corporate debt, and government securities. These asset classes are more likely to yield higher returns in the future and eventually earn a promising return on the actual money contributed, which is higher than any traditional pension plan. However, such investments might be subjected to risks based on market fluctuations.

3. Annuity Income

Subscribers are not allowed to withdraw money from their NPS account until maturity, that is, till retirement (60 years of age). Post retirement, one can withdraw up to 60% of the total corpus, which is again a tax-free amount.

As per the NPS trust guidelines, one must invest the remaining 40% of the corpus in an annuity plan to provide a monthly pension. Thus, one gets a steady flow of income every month, even after retirement.

4. Compound Growth

The lock-in period until retirement or 60 years of age ensures a long-term investment plan for the subscribers. During this period, the corpus accumulated expands at a compounding rate, offering maximum market-linked returns as per your investment model.

Such a significant boost in the pension amount helps you build a larger corpus for the retirement years.

Final Thoughts

As discussed above, the National Pension System is a flexible, secure, and all-inclusive retirement planning tool. It helps individuals to be financially independent, even in their post-retirement days. The scheme has several perks like tax exemption, and high return on investments that will help in long-term wealth creation.

FAQs

1. When should I start planning for NPS?

It is always advisable to start investing in NPS the moment you start earning. This will enable you to make smaller yet regular contributions over a longer period of time. By the time you reach your retirement age (60 years), you’ve already accumulated a significant corpus in your NPS account.

2. For how many years will subscribers receive a pension from NPS?

This depends on the NPS plan chosen by the subscribers. The pension might end once they die, or it might be transferred to their spouse, dependent parents, or finally to the legal nominee. However, all this is dependent on the type of NPS plan the subscriber is enrolled in.

3. What is premature withdrawal in the National Pension System?

As per the premature withdrawal policy in the NPS scheme, subscribers can exit from their NPS scheme and withdraw up to 25% of the total deposited amount after three years. This withdrawal will be part of their annual income and taxable as per the tax slab of that financial year.