It is advisable to have a safety net in place for the uncertain future that lies ahead. Have you ever wondered how your grandparents have so much money even though they don’t work anymore? Part of the answer is pension. Simply put, a Pension is the amount of money saved through various means by an employee to live comfortably after retirement. Several companies that provide financial services do have pension schemes. Nonetheless, the government also offers many pension schemes. One of them is the National Pension Scheme (NPS).
National Pension Scheme (NPS)
The Indian government established the PFRDA (Pension Fund Regulatory and Development Authority) in 2003 to regulate the pension schemes in the country. A year later, the National Pension Scheme (NPS) was launched. The objective of this scheme was to provide citizens with pension funds and make sure the citizens follow the habit of saving for retirement. It was challenging to implement this scheme in the unorganized sector. This led to the formation of pension schemes like Swavalamban Scheme, where the govt contributes Rs. 1000 each year provided the yearly contribution ranges from Rs. 1,000 to Rs. 12,000 each year.
Certain must-know regulators of NPS
PFRDA – The government of India sets up the Pension Fund Regulatory and Development Authority as an autonomous body that overlooks the pension market and scheme in India.
Point of presence (POP) – The institutions prescribed as POP are the first point of interaction for NPS subscribers. These institutions include public and private banks and financial institutions. These POPs play a crucial role in opening NPS accounts.
CRA (Central Recordkeeping Agency) – As the name suggests, the CRA is responsible for recordkeeping, administration, and providing customer services to the NPS subscriber. NSDL is the CRA for NPS.
ASPs (Annuity Service Providers) – The ASPs are majorly responsible for delivering the prescribed pension to the NPS subscriber.
WHO CAN JOIN NPS Any central or state government employees who joined on or after 1st January 2004
Companies have the flexibility to decide if they want to invest at A subscriber level or the corporate level for all the employees.
Any Indian that comes under the age bracket of 18-60 years, belonging to an unorganized sector (not a regular employee in the private or public sector).
BENEFITS OF NPS
TRANSPARENT – The NPS subscriber can regularly check the investment value, making the scheme more transparent and cost-effective.
VOLUNTARY- There is no specified age or mandatory notice to apply for NPS. Any person can start their pension scheme at any point in time.
SIMPLE – There is no need for complex paperwork. The POPs make the process easier.
FLEXIBLE – Interested individuals can choose a suitable pension scheme and investment option.
REGULATED – Due to the involvement of bodies like PFRDA, POP, CRA, and ASPs, the entire scheme plan is regulated to ensure the investments are not tampered with.
PORTABLE – Upon resignation, subscribers can still transfer their NPS scheme intact to another organization. This is due to the unique number and separate PRAN provided to each subscriber.
TAX BENEFITS – The scheme is liable for tax exemption as per section 80C of the Income Tax Act, 1961. Only the amount withdrawn after the age of 60 is eligible to be taxed.
TAXATION ON NPS
Contributions made to the NPS scheme by both individuals and employees are eligible for tax deductions of up to Rs. 50,000 under Section 80CCD with an overall limit of Rs. 1.5 lakh under Section 80CCE of the Income Tax Act.
Tier 1 contributions offer tax benefits, while tier 2 contributions are taxed as per the individual’s applicable income tax slab. 60% of the total corpus can be withdrawn lump sum and the remaining 40% can be received through an annuity plan. If the entire corpus is less than or equal to Rs. 5 lakhs, it can be withdrawn entirely tax-free. For a corpus of Rs. 20 lakhs, the tax-free withdrawal limit would be Rs. 12 lakhs. The remaining amount is received through an annuity plan and is taxed based on individual’s tax slab. These provisions make NPS an attractive retirement savings option with tax benefits.
LAST WORD
We tend to get carried away with daily expenses and pay less attention to savings. Various financial institutions provide multiple pension schemes, and you may opt for whichever scheme suits your goals the most. NPS is a lifesaver as it is reliable, flexible, and easy to navigate. It is a promising investment avenue for retirement. With so many benefits and a regulator involved, the scheme may be a good approach for low-risk appetite investors.
Source By: livemint
