National Pension System: Features, Benefits, and Schemes

If the answer is yes to the above questions, then you must consider saving in National Pension System. National Pension System (NPS) is a long-term investment and voluntary plan for retirement under the regulation of the Central Government and Pension Fund Regulatory and Development Authority (PFRDA). In this article, we will learn more about National Pension System.

What is NPS?

NPS is a government-sponsored pension System. Originally launched in January 2004 for government employees and then in 2009, it was opened to all citizens. Hence, this pension System is open to employees from the public, private and even the unorganized sectors except those who serve in the armed forces on voluntary basis. Even NRIs can also invest in NPS.

Under this System, people invest in a pension account at regular intervals during the course of their employment and after retirement, the investors can withdraw a certain percentage of the accumulated fund. The NPS subscriber will get the remaining amount as a monthly pension post-retirement in form of annuities. NPS System is of enormous value for anyone who is in the private sector and requires a regular income after retirement. The National Pension System is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

Why you must consider investing in NPS? 

Anyone between 18 years and 65 years of age, willing to get tax benefits along with decent returns* with flexible Investment choices, must consider investing in National Pension System. Getting a monthly income after 60 is no doubt an advantage for private-sector employees as we tend to have a lot of expenses in the latter half of life like medical expenses, children marriage, etc. Systematic investment in this low-risk option can make an enormous difference to your post-retirement life. The tax deductions under section 80C are actually the cherry on the top.

Features of NPS: 

• Portability – NPS is easily portable and does not have any Geographical restrictions. An account which opened in any State of India can be easily accessed from all over the country. NPS corporate accounts are easily transferable between employers.

• Flexible – Get Full control on your Investments. NPS gives the subscriber the flexibility to choose the Fund Manager, Investment Option, Annuity Service Provider, etc. This gives you total control over your investments.

• Economical – NPS is currently one of the best, safest and cheapest investment option available in India.

• Voluntary – NPS is a voluntary product for citizens of India. NPS is compulsorily under the fixed contribution System, only for central and state government employees.

Benefits of National Pension System 

The benefits that you get from investing in the National Pension System are endless.

• Returns in National Pension System 

A part of your NPS investment goes into equities and hence the returns are market-linked. Hence, it offers returns that are much higher than most of tax-saving investments like the PPF, and FD. This System so far has double-digit annualized returns (in some Systems). In NPS, you are also allowed to change your fund manager, if you are unsatisfied with the performance of the fund.

• National Pension System  tax benefit 

Tax Benefit available to Individual:

Any individual who is a subscriber of NPS can claim tax benefit under Sec 80 CCD (1) with overall cap of Rs. 1.5 lac under Sec 80 CCE. An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). Hence, tax benefit of a total of 2 lakhs rupees is available under section 80C of Income Tax Act. 1961.

Tax Benefits under the Corporate Sector:

Corporate Subscriber: Additional Tax Benefit is given to NPS investors under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer's NPS contribution (for the benefit of the employee) up to 10% of salary (Basic + DA), is deductible from taxable income, within limit of Rs. 7.50 Lacs as explained in the Budget 2020 ( PF, NPS, and Superannuation Fund).

Corporates: Employer’s Contribution towards National Pension System up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account of that accounting year. Please note: Tax benefits are applicable for investments in Tier I accounts only.

• Risk Assessment

Currently, there is a cap in the range of 75% to 50% on investment in equity in the National Pension System (For government employees, this cap is 50%). 

Every year, the equity portion will reduce by 2.5% beginning from the year in which the investor turns 50 years. This stabilizes the risk-return equation for the interest of investors, which means the corpus is comparatively safe from the market volatility. The earning potential of NPS is higher as compared to other fixed-income, traditional tax-saving Systems.

• Option to change the System or Fund Manager

In NPS, if you are unsatisfied with the performance of your selected System or the fund manager, you have the provision to change both of them. This option is available for both tiers I and II accounts.

• Withdrawal Rules After 60

You cannot withdraw the entire corpus of the NPS System after your retirement and it is compulsory to keep aside at least 40% of the accumulated fund to receive a regular pension/ annuity. The remaining 60% is tax-free now. The annuities that you receive as pension at regular intervals are taxable. 

• Early Withdrawal and Exit rules

As per the norms of National Pension System, it is of utmost importance that you continue investing until the age of 60. However, after investing for at least three years, you may withdraw up to 25% of Self- Contribution for certain purposes like children’s wedding or higher studies, building/buying a house or medical treatment of self/family, etc. 

You may withdraw up to three times (with a gap of five years) in the entire tenure. All these restrictions are there only for tier I accounts and not for tier II accounts. 

Benefits of Investing in NPS with BajajCapital

Types of NPS accounts

There are two types of NPS accounts:

Tier I:  

• Eligibility: 18 to 65 years of age

• Tax Benefits: It qualifies for tax deduction under Section 80CCD (1) and Section 80CCD(1B), and one can get a tax deduction of up to 2 lakhs

• Lock-in Period: Has a lock-in period and one can withdraw after the age of 60, 

• Minimum contribution amount each year: Rs. 500 

• Minimum number of annualized contributions: 1

Tier II:

• Eligibility: Must have a Tier 1 account

• Tax benefits: No tax benefit is given to Tier 2 subscribers. Government employees will get a tax benefit of 1.5 lakhs. 

• Lock-in Period: Nil

• Minimum contribution amount each year: Not minimum contribution needed.  

• Minimum number of annualized contributions: Nil

Note: The Fund management charges and the available asset classes are the same for both the types of accounts. 

Comparison Between NPS and other tax saving options

The chart below shows the comparison between NPS and other tax saving options:

NPS Calculator

If you wish to calculate the returns on your investment, click here.