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NPS Benefits – Features and Advantages

National Pension Scheme or NPS has become increasingly popular. It is really important to know the benefits of NPS. But before that, let’s have a look at the meaning of NPS.

NPS is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life.

Didn’t understand? Let’s make it simple for you. Read on.

NPS is a government-sponsored pension scheme. It is a tax saving scheme u/s 80C. Just like EPF or (Employee Provident Fund) and PPF (Public Provident Fund), NPS is an EEE i.e. exempt-exempt-exempt instrument in India. Its major purpose is wealth creation for retirement. The investment also offers certain tax benefits

It is administered and regulated by the PFRDA- Pension Fund Regulatory and Development Authority. On opening an account with the National Pension Scheme, a unique Permanent Retirement Account Number or PRAN is issued. All fund management and contributions are done via PRAN.

The NPS has a total of around 1.34 crore subscribers. Out of this huge number, approx 68 lakh subscribers are employed with the Central or State Government.

There are few NPS benefits which has made it increasingly attractive among the individuals of all age groups. Let’s have a look at this increasingly popular scheme.

NPS Benefits- Advantages and Features:

1. Liquidity and Flexibility with the help of 2 different accounts:

Individuals can invest via either of the following 2 accounts:

Tier I account– This account functions as a pension account and withdrawals from it are subject to certain restrictions. An individual can open this account with a minimum deposit of INR 500. 

Tier II account– This is a voluntary account. It is allowed only when there is an active Tier-I account in the subscriber’s name. The account provides liquidity of funds via investments and withdrawals. The minimum investment for opening this account is INR 250.

Individuals can subscribe to the National Pensions Scheme with PFRDA-appointed intermediaries via the two accounts mentioned above. The intermediaries are:

2. Flexibility via 2 different choice of asset class:

There are two investment choices at an individual’s disposal:

Auto Choice– It is available as a default option for the subscribers. Fund investments under this option are managed automatically by an appointed fund manager as per an investor’s age profile.

Active Choice– Individuals are free to decide among available asset classes in which they can invest their funds. Different percentages of contributed funds are allocated to each asset class.

Note: The maximum cap for Asset Class E or Equities is 50%

Subscribers have an option to switch their investments options as well as change their fund managers. But these options are subject to constraints.

3. Option to make a partial withdrawal:

This is another benefit NPS offers. The option to withdraw contributions partially gives individuals partial accessibility to their funds. These funds are saved over years and might allow them to meet financial needs before retirement in case of emergencies.

A subscriber can make withdrawals of their Tier-I scheme contribution upto a maximum of 25%, subject to:

4. Tax benefits:

The following are the tax benefits of NPS investments U/S 80CCD:

Other Tax Benefits on Tier-I investments are:

Note: Suppose after 60 years of age, the total corpus created through the NPS amounts to INR 10 lakh. A withdrawal of INR 4 lakh will not attract any tax. Also, if the remaining 60% of the corpus is utilized for for annuity purchase, the entire corpus will become tax-free.

5. Other advantages are:

    Such transfer is not taxable in the hands of an individual.

Although NPS has a lot of benefits, there are a few disadvantages, too. For example, only 40% of the corpus of tax free. This is less compared to 100% in other investments like PPF, ELSS and Life Insurance. But a well structured withdrawal strategy might effectively reduce tax liability to zero.

Read to know the steps to apply for NPS and claim NPS Benefits.

Who Benefits from NPS

1. Government sector National Pension System model:

The pension system is applicable for Central and State Government employees. It is not applicable for those with armed forces. Under this model, a contribution of 10% of a government employee’s salary goes to the National Pension System with an equal contribution by the government. Central Government employees receive a contribution of 14% from the government. 

Note: All states in the country have implemented the NPS excluding West Bengal.

2. The corporate model of National Pension System:

Corporate employees enrolled by their employers can utilise the benefits of the pension system. In order to enroll, they must be Indian citizens between the age of 18 and 60. They should also fulfill the KYC requirements in the Subscriber Registration Form. The model is applicable for entities as under:

Yes, the dangling carrot of tax benefit should not be overlooked. One should not just aim for the tax benefits. Therefore, investing in the NPS should be a method to fulfill the retirement needs.

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File Your Tax Return

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Open Your Account Today

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