Everything you need to know about the National Pension System

All your life’s hard work and struggle pays off during retirement, your golden years, if you have an effective retirement plan in place. A good retirement plan will ensure you get a steady flow of income after you’re done working. One such effective plan that every Indian citizen is entitled to is the National Pension System or NPS. So, what is NPS and how does it work? Let’s figure out all you need to know about NPS here so that you can get started.

What is NPS?

NPS is a voluntary retirement plan that all Indian citizens between 18-70 years of age can invest in. It’s a government scheme that even corporate sector employees and self-employed individuals can benefit from.

Not only does the NPS help you save money, but also helps in reducing your taxes as the plan is eligible for a tax deduction. You invest a certain amount of money every year which builds up a corpus fund that you can withdraw during retirement. So, the earlier you plan, the more you can benefit from it.

Types of NPS accounts

There are two types of NPS accounts:

●      Tier I account:

When you want to invest under NPS, this is the default scheme you go for at first. It requires a minimum initial investment of Rs. 500 and a minimum annual investment of Rs. 1,000. There is no limit to the maximum amount you can invest in.

Here, you get a lock-in period till the age of 60. Withdrawals are permitted only after the lock-in period unless there are special circumstances. You are entitled to a tax deduction for NPS investment up to Rs. 1,50,000 each year under section 80 C and further deductions for up to Rs. 50,000 under section 80CCD (1B) of the Income Tax Act, 1961.

●      Tier II account:

This account is completely voluntary and you’re eligible to invest here if your Tier I account already exists. The minimum initial investment here is Rs. 1,000 and the minimum annual contribution amount here is Rs. 250. There is no tax deduction or lock-in period here. This means you can withdraw from here at any given point in time.

NPS scheme details – Rules for application, investment, and withdrawals

The easy and quick way to apply for NPS is through the online portal where you need to link your account to your Aadhaar, PAN, and mobile number.

Once your permanent retirement account number is generated, you need to make the initial investment. Your pension fund manager will take care of the investments you make here, helping you select the investment mode – equity, corporate debt, or government bonds. You’re allowed to change this mode only once in a financial year.

For Tier I account, the maximum age for exiting the scheme is 75 years. After that, you are entitled to withdraw 60% of the total corpus amount you have, while the rest 40% is to be invested in an annuity scheme if your corpus amount is more than Rs. 5,00,000.

You can make three premature withdrawals throughout the tenure, given it is for children’s higher education and/or marriage, house purchase/renovation, or medical emergencies. This is limited to 25% of your total investment and only applicable for those who have invested for at least three years.

Going for an NPS scheme is important for every individual as it helps contribute to your retirement corpus. Retirement planning ensures that you don’t have to financially depend on anybody in your golden years and are financially stable even after you stop working.