What is the National Pension Scheme (NPS)? Advantages, tax benefits, and more

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The national pension scheme is a voluntary retirement scheme, through which one can create a retirement corpus or an old age pension. This scheme was initiated by the government of India on January 1, 2004, for government employees and later extended to the normal citizen from may 1,2009. This scheme is regulated by PFRDA (Pension Fund Regulatory & Development Authority).

The NPS scheme is available to every Indian citizen who falls in the age group of 18-60. A person is allowed to join NPS until they turn 60, and they contribute until they turn 70 years old. A person either employed by an employer or self-employed can enroll themselves, many employers provide this scheme for their employees, but if it isn’t available with your employer you can still enroll yourself for this scheme. Also if your employer allows and you both agree then you can convert your PF account to the NPS scheme.

What are different account types under the NPS scheme?
You have 2 different accounts under the NPS scheme, the first one is Tier 1- This account is a retirement account and comes with some host tax benefit, but you’re not allowed to withdraw until you turn 60 years old. And under the Tier-2 account, there are no restrictions, and you can withdraw your money as you wish.

The Tier-1 account is necessary to open when you sign up for NPS. Tier-2 is optional and you can enroll for it by filling out a form, but you can’t open a Tier-2 account unless you already have a Tier-1 account in place.

Although you can withdraw money from your Tier-1 account prior to turning 60, under some circumstances such as treatment for critical illness, children’s education, or marriages.

How do your contributions get invested under the NPS scheme?
When you sign-up for NPS, you’re required to invest a sum of ₹500 to start with for the TIER-1 account and ₹1000 to start under the TIER-2 account. The frequency and amount of your further contributions may vary, but you would need to make a deposit of at least ₹1000 for the TIER-1 account and ₹250 for the TIER-2 account.

The money that you contribute is going to be invested in market-related funds. There are 4 different types of asset classes in which your money is invested. The asset class is Equity(e), Corporate bond(c), Government securities (G), and Alternative Investment Funds (A). There are 2 different investment options, you can either choose auto allocation or self allocation. Under auto allocation, your money is automatically invested based on your age. And if you choose self-allocation you would get a chance per year to choose your investment allocation.

What are the tax benefits under the NPS scheme?
There are some tax exemptions that can be claimed if you’re investing your money in the NPS scheme. If you have a TIER-1 account, you claim a tax benefit of ₹1.5 lakh under section 80C and an additional 50000 exemption for investment with a TIER-1 account under section 80CCD (b). However, no tax benefit can be availed for investment under the TIER-2 account.

Also on maturity, you can withdraw 60% of your money with tax exemption. But the rest 40% is for pension payments. Remember that pension is considered as income and you would have to pay tax on it as per your tax slab.

What are the advantages of the NPS scheme?
The following are the advantages of the NPS scheme:
1. Lifetime pension is provided under the NPS scheme, after your retirement you receive 60% of your corpus and the rest 40% would be used for a regular pension.

2. Your family is taken care of in case anything happens to you, your family would still receive a monthly pension.

3. There is no investment commitment under this scheme, you invest just ₹1000 per year and still have your investment continued.

4. Tax benefits of around ₹2 lakh, can be claimed under 80C if you are a subscriber of this scheme.

5. Automatic risk reduction with age is provided if you choose an auto investment option under this scheme.

Conclusion – In the following article, we have mentioned every necessary detail about the NPS scheme. Overall this is a very nice scheme, and you can also save up to ₹ 2 lakh per year, also automatic investment from your salary through your employer makes it even better

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