Retirement is a stage of life that everyone anticipates. It is a time to enjoy the results of your labour and pursue your hobbies and interests. However, retirement also brings some challenges, such as maintaining your lifestyle, meeting your expenses, and coping with inflation and health issues. Therefore, it is essential to plan your retirement well in advance and save enough money to secure your future.
One of the best ways to plan your retirement is to invest in the National Pension System (NPS), a voluntary, defined contribution retirement savings system. NPS is designed to facilitate a regular income post retirement and is based on the unique Permanent Retirement Account Number (PRAN) which is allotted to every individual that applies for the same. In this article, we will explain the features, benefits, and tax implications of NPS and how to open and manage your NPS account online.
What is NPS?
NPS is a government-backed pension scheme that was launched in 2004 for government employees and extended to all Indian citizens in 2009. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and administered by the National Pension System Trust (NPST). NPS allows you to save for your retirement by making regular contributions to your NPS account during your working years and receive a pension after retirement.
How does NPS work?
NPS works on the principle of defined contribution, which means that you decide how much you want to contribute to your NPS account every year. The minimum annual contribution for NPS is ₹1,000 and there is no upper limit. You can choose from two types of accounts under NPS:
Tier I account:
This is the mandatory account for long-term savings. You cannot withdraw money from this account before retirement, except in certain cases such as death, disability, or critical illness. You can avail exclusive tax benefit up to ₹50,000 under Section 80CCD(1B) of the Income Tax Act for investing in this account.
Tier II account:
This is an optional account that provides you the flexibility to invest and withdraw from various schemes available in NPS without any exit load. You can open this account only if you have a Tier I account. There is no tax benefit for investing in this account, except for government employees who can claim deduction up to ₹1.5 lakh under Section 80C for investing in this account.
You can make contributions to your NPS account through various modes such as online, offline, or auto-debit. You can also choose from different investment options and fund managers for managing your money under NPS. The returns on your investments depend on the performance of the underlying assets and are not guaranteed by the government or PFRDA.
What are the benefits of NPS?
National Pension System offers several benefits for retirement planning, such as:
- Low cost: NPS charges very low fees compared to other pension schemes. The fund management fee is only 0.01% per annum and the transaction fee is only ₹3.75 per transaction.
- High returns: NPS has outperformed fixed deposits and provident funds over the years. The average annualized return of NPS since inception till March 2021 was 10.03% for equity funds, 9.88% for corporate bond funds, and 8.65% for government bond funds.
- Tax efficiency: NPS offers multiple tax benefits for investors. The contributions made to Tier I account are eligible for deduction up to ₹1.5 lakh under Section 80C and an additional deduction up to ₹50,000 under Section 80CCD(1B). The interest earned on Tier I account is also exempt from tax. The withdrawals from Tier I account are partially taxable as 40% of the corpus is tax-free, 40% has to be annuitized (which is taxable as per slab rate), and 20% can be withdrawn as lump sum (which is taxable as per slab rate). The withdrawals from Tier II account are fully taxable as per slab rate.
- Flexibility: NPS lets you pick how much, how frequently, where, and who you invest in. Switch between plans and fund managers as you please. No problem, you can transfer your NPS account between employers or sectors.
- Portability: NPS is portable across all sectors and locations. You can access your NPS account from anywhere in the world through the online portal or the mobile app. You can also link your NPS account with your Aadhaar, PAN, and bank account for easy verification and transactions.
- Security: It is a secure and transparent pension scheme that is regulated by PFRDA and administered by NPST. Your money is invested in various instruments such as equity, corporate bonds, and government securities that are monitored by the fund managers and custodians. You can also track your NPS account online and get regular statements and alerts.
How to open and manage your NPS account online?
Opening and managing your NPS account online is very easy and convenient. You just need to follow these simple steps:
- Visit the eNPS portal and click on “Registration”.
- Choose the option “Register with Aadhaar” or “Register with PAN” as per your convenience.
- Fill up the online form with your personal, contact, and bank details.
- Upload your scanned photograph (optional for Aadhaar) and signature.
- Make the initial contribution of minimum ₹500 through net banking, debit card, or UPI.
- Authenticate the form through OTP or eSign process.
- Receive your PRAN (Permanent Retirement Account Number) and password on your registered mobile number and email ID.
- Log in to your NPS account using your PRAN and password.
- Complete the e-KYC process by submitting the required documents online or offline.
- Choose your pension fund manager, investment option, and scheme preference.
- Make subsequent contributions to your NPS account as per your convenience.
Conclusion
NPS is a smart way to plan your retirement with low cost, high returns, tax efficiency, flexibility, portability, and security. You can open and manage your NPS account online with ease and convenience. You can also consult a financial planner if you need any guidance or advice on retirement planning. Remember that the sooner you start saving for your retirement, the better it is for your future. So, don’t delay and start investing in NPS today.