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NPS
National Pension System (NPS)
Comprehensive Overview
The National Pension System (NPS) is a government-backed retirement savings scheme in India, aimed at providing individuals with a regular income after retirement. It is designed to encourage savings for retirement among citizens by offering a low-cost and tax-efficient investment platform. Here’s a detailed explanation:
Key Features of NPS
Eligibility
- Open to all Indian citizens (resident and non-resident) between the ages of 18 and 70 years.
- Corporate and individual subscribers can both participate.
- Both salaried and self-employed individuals are eligible.
Structure
- Tier-I Account: Mandatory for all subscribers; primarily for retirement savings with limited withdrawal options.
- Tier-II Account: Optional, acts as a savings account with more flexible withdrawal rules but does not offer tax benefits.
Investment Options
- Contributions are invested in a mix of Equity (E), Corporate Bonds (C), and Government Securities (G).
- Subscribers can choose between:
- Active Choice: Decide the allocation among E, C, and G (with a cap of 75% on equity for most age groups).
- Auto Choice: A lifecycle fund where the asset allocation changes automatically with the subscriber’s age.
Contributions
- Minimum annual contribution:
- Tier-I: ₹1,000 per year.
- Tier-II: No minimum contribution.
- No maximum limit on contributions.
Account Portability
- Fully portable across locations and employers, ensuring continuity.
Tax Benefits of NPS
Under Section 80CCD(1)
Employee contribution up to 10% of salary (basic + DA) or ₹1.5 lakh (whichever is lower) qualifies for tax deduction within the overall limit of Section 80C.
Under Section 80CCD(1B)
Additional tax deduction of up to ₹50,000 for NPS contributions, over and above the ₹1.5 lakh limit of Section 80C.
Employer Contribution
Contributions made by an employer are deductible under Section 80CCD(2), without any upper limit but subject to 10% of salary.
Withdrawals and Exit Rules
Before Retirement
(Premature Exit)
- Allowed only after 5 years
of joining. - 20% of the corpus can be withdrawn as a lump sum; the remaining 80% must be used to purchase an annuity.
At Retirement (After 60 Years)
- Up to 60% of the corpus can be withdrawn tax-free as a lump sum.
- The remaining 40% must be used to buy an annuity to ensure regular income post-retirement.
Partial Withdrawals
- Allowed for specific purposes (e.g., higher education, marriage, medical emergencies) after 3 years of subscription.
- Limited to 25% of the subscriber's contributions.
Key Benefits
Retirement Security
Provides a steady income stream post-retirement.
Cost-Effective
One of the lowest fund management charges compared to other investment options.
Flexibility
Subscribers can switch between fund managers and investment options.
Transparency
Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring safety and transparency.
Tax Efficiency
Multiple tax benefits make it an attractive retirement investment tool.
How to Open an NPS Account
- Visit a Point of Presence (PoP), such as banks and other designated entities, and submit the filled NPS application form along with KYC documents.
- Register via the eNPS portal (https://enps.nsdl.com).
- Use Aadhaar or PAN for verification and link it to your bank account.
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Disclaimer:– Mutual fund investments are subject to market risks. Please read the scheme information and other scheme related documents carefully before investing. Past performance is not indicative of future returns and future performance. Always Consider your specific investment requirements before choosing a fund, or designing a portfolio allocation that suits your needs. Investments in equity shares, debentures, etc., are not obligations of, or not guaranteed by – Future Savings
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