What is NPS | The Best Retirement Plan

What is NPS | The Best Retirement Plan

 I will provide you information about NPS. Because this is a very good retirement planning option. In this, you can earn more returns than PPF and EPF. And this comes underExempt Category. That means a lot of your tax is saved.

What is NPS | The Best Retirement Plan

And the most interesting thing are you don’t have to be an employee of an organization. You can start an NPS Account from your end as well.

In the year 2004, Central Government had launched this scheme. Only for the Government Employees. It has a similar protocol like PPF and EPF. You regularly contribute an amount, that amount will be invested somewhere and after retirement you can withdraw the amount. And you can even generate a Pension.

Then in the year 2009, PFRDA i.e Pension Fund Regulatory and Development Authority got its charge and they opened it for everyone. That means, even a normal person can open his NPS account on voluntary basis.

That means he can open the account based on his choice. So If your age is between 18-65, you wish to plan your retirement. You wish to save your tax and you don’t want to take a heavy risk like the stock market.

Then NPS is a very nice option for you. But in regards to NPS, as the money is also invested in stock market and the returns of the stock market is never fixed they can be either higher or lower. Hence, your returns are also variable.

What is NPS | The Best Retirement Plan

But this doesn’t mean that there is a lot of risk there. It is very little risk and I shall explain that to you in a while. And If I talk in regards to the past 10 years, then NPS has given returns between 8-10% That means at times, they have given more than PPF and EPF.

While opening the Account, you will require a minimum of INR 500/- And the minimum contribution at a time is also INR 500/- Plus the minimum contribution that you need to maintain in a year is also INR 500/- which needs to be done mandatorily.

That means every year you need to invest INR 500/- And If you didn’t invest, until 2 years you didn’t invest INR 500/- (twice) then your account will be considered dormant.

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But then you can re-activate by paying INR 1000/- The Government of India has appointed 7 Fund Managers, the one’s who manage your funds invested in NPS. which are LIC, HDFC Pension Fund, UTI Mutual Fund, SBI Pension Fund, ICICI Prudential Fund, Aditya Birla Capital, Kotak Mahindra Bank As an NPS Subscriber, you can choose among the 7, as to which Fund Manager will manage your money.

And you can even change your Fund Manager in the future. So you have that freedom. Now let’s talk about where does the money goes which is invested in NPS i.e. Where is it invested?

Where The Amount Of NPS is Invested

Then it is divided into 4 categories. 1st is Low Risk, 2nd is Moderate Risk and 3rd is High Risk and 4th is Very High Risk. Under Low-Risk Assets, there are Government Bonds, Moderate Risk Asset includes Corporate Bonds, High-Risk includes Equity i.e. Stock Market and Very High Risk includes Alternative Investments, wherein you can only allocate 5% of your Total Fund.

Because this is a very High Risk Asset. Examples for Alternative Investments are Real Estate Investment Trusts or Alternative Investment Funds or IIT’s i.e. Infrastructure Investment Funds.

Now let’s talk about Asset Allocation, as an NPS Subscriber, you have complete freedom to decide that how much % of your funds should be invested in Equity, how much % in Corporate Bonds, how much % in Government Bonds, and how much will be invested in Alternative Funds.

What is NPS | The Best Retirement Plan

Options In NPS

There are 2 options for you, either you choose Active Choice or Auto Choice. In Active Choice, you can decide on the percentage or else you can choose Auto Choice, where in you won’t have to take so much trouble. First, I’ll explain to you about Active Choice.

In Active Choice, although you have the freedom to decide your %, but there is one limitation as well. Until 50 years of age, you can allocate up to 75% of your funds in Equity, which means you can’t give 100% to your Equity. And once you turn 50, after that every year, Equity Allocation keeps declining by 2.5% and it will come to 50% once you reach 60.

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The funds are reduced from Equity and is transferred to the Government Bonds or Corporate Bonds. This is done because Equity is considered to be High-Risk and as you grow older, your capacity to take risks decreases. It is done to save you from risks. And the other % that will be set by you, you can change that twice in a year.

Now If we talk about Auto Choice. This gives the exact same feeling as If a new person visits Subway and prepares his own Sub Firstly, the poor chap has to choose his bread and then he has to choose the stuffing inside.

Later, he needs to decide among varieties of sauce and this sometimes becomes overwhelming. Then If you don’t know how much % should go in the Asset Class Then you select Auto Choice, here you will find 3 simple options.

1st is the Aggressive Life Cycle Fund, which is made for High-Risk Takers Here, you have one condition, that the Maximum Equity Allocation can be 75% only and you can do it until 35 years. After that, every year your equity allocation will decline by 4% and when you turn 55, then it will remain 15% only.

Or else, you can choose Moderate Life Cycle Fund. Here there is Moderate Risk. Here you can’t allocate more than 50% until the age of 35, after that this allocation will start declining by 2 – 2% every year and in the end 10% of Equity Allocation will remain If you don’t want to take any risk,

then you can opt for Conservative Life Cycle Fund. Here, until the age of 35, you will have the option of maintaining 25% of Equity Allocation After that, every year there will be a decline of 1% and towards In the end, you will have 5% of Equity Allocation.

How To Withdraw From NPS

Now let’s talk about the different types of Withdrawals, Then the first thing that you should know If this is a Retirement Planning Scheme. Then it’s obvious that it won’t allow you to withdraw before your retirement period. It won’t do.

What is NPS | The Best Retirement Plan

Your lock-in period is until 60 years of age. And after 60 years, you can continue until 70 years of age. Or you can defer it until 70 years. To continue means, you are investing a monthly contribution in that. And to defer means that you are not providing contribution and you wish to withdraw after 70 years.

Until 60 years of age, maximum of 60% withdrawal is allowed. You can’t withdraw more than that. And the remaining 40%, you need to compulsorily buy an Annuity from an Insurance Provider who will provide you a monthly pension on that amount.

And the 60% which is the withdrawal, If you wish to withdraw in 10 different installments, then that the facility is available as well. Let’s assume, you had opened an NPS Account in fun, you didn’t invest more contribution or you might have opened it late.

Now the funds accumulated is less than 2 Lakhs. Then you can withdraw 100%, there is no issue with that. Now I have told you that there is no withdrawal allowed. Until 60 years of age.

But premature withdrawal is mostly available in all the schemes, and NPS has it too. For Premature Withdrawal, you need to regularly contribute for 3 years. After that, you can withdraw 25% of your own contribution. Now, what do I mean by “Your own”?

There are times where in NPS is allowed in the Company as well. i.e. You and your Employer both contribute to your NPS. Then, in that case, you can’t withdraw the Employer Contribution You can withdraw 25% of your own contribution. That too, up to 3 withdrawals, Once in every 5 years. And that shouldn’t be without any reason.

There have to be special reasons, which are Serious Illnesses, Children’s Wedding or Children’s Education, or to renovate or buy a house. If you wish to spend money on your skill development. You can withdraw for that too and If you wish to start a Business.

Then you can withdraw money for that too. Now, this was Premature Withdrawal, there is another feature as Premature Exit. What does this mean? This means that you have opened the NPS Account.

But you wish to retire before 60 years of age and wish to start the pension from NPS Account. Then that option is available too. In that case, you need to keep your account active for at least 10 years.

That means need to consistently contribute until 10 years. And then you can withdraw maximum 20% and 80% you need to buy Annuity which will pay monthly pension to you. And in this case, If your fund is less than 1 Lakh, then you can withdraw 100% by taking voluntary retirement. After Premature Withdrawal, even after withdrawing your NPS Account is operational.

But in the case of Premature Exit, this doesn’t happen. If you have taken a Premature Exit, that is Voluntary Retirement, then your account will be closed and you will start receiving pension exactly how it happens at 60.

Tax Benefit by NPS

Now let’s talk about its tax benefits, then it comes under Exempt Category. That means the contribution which is done in this is tax-free. The return that is received on this is Tax-free and finally when you withdraw the amount, then it is tax-free.

What is NPS | The Best Retirement Plan

But there is one component, which is taxable. I’ll explain that to you. Firstly, I will explain the tax deductions to you. Section 80CCD: Under Sub Section 1, you can claim a deduction of 1.5 Lakh which is a part of 80 C, which means the contribution that is done on this can be claimed on 80 C and you can’t claim deductions which are above 1.5 Lakhs in 80 C.

You can claim an additional deduction of INR 50,000/- more. Section 80CCD: Under Sub Section 1B That means you received 1.5 Lakh under 80C and INR 50,000/- was additional. That means you can claim for a deduction of 2 Lakhs.

Moreover, If your company provides NPS, i.e. If you are on your behalf, your Employer also contributes and you contribute yourself too. Then you can claim Employer Contribution as well Under Section 80CCD: Sub Section 2 which cannot be more than 10% of your Basic + DA And the contribution that the employer provides,

he shows it as a Business Expense, and claim it as a Tax for his company. That also cannot be more than 10% of your Basic + DA You might have understood, that how much ever you contribute in NPS in a year, you can claim that on the deduction, there won’t be any tax on that.

The return that is earned on that is also tax-free. And once you withdraw afterward, that is also tax-free. But there is a catch, you are withdrawing only 60%, 40% you will be purchasing Annuity on that, and you will earn a monthly pension on that.

Now the monthly pension can be considered your part of income, and you will have to pay tax on that. Apart from that, everything is tax-free. And now you have got to know, that NPS can also be applied to Companies.

And Employer + Employee both can contribute. But there is no compulsion, as in the case of EPF of equal contribution.

In NPS, there can be unequal contributions too. There is a possibility that Your Employer might contribute something else and you are contributing something else or there is a the possibility that your Employer might be the only one contributing and you aren’t contributing. And If you are doing it and the Employer isn’t Now there are two types of account in a Pension, 1 is Tier 1 Account and another is Tier 2 Account, and all that I have mentioned until now is about Tier 1 Account.

You receive Tax Benefits in Tier 1 Account only. But in the Tier 2 Account, you receive some benefits. For eg: There is no lock-in period for you. You can invest as much as you want and withdraw whenever you want. There is no minimum investment, Invest INR 10/- instead of INR 500/- There is no issue. However, there is a catch here, that you won’t receive any benefits on tax This is fully taxable.

What is NPS | The Best Retirement Plan

That means this is similar to a Mutual Fund. Because, If we don’t talk about ELSS, then Mutual Fund works exactly like this. Invest as much as you want and withdraw whenever you want. When you withdraw it will be considered as an Income. and tax will be levied on that. And to create a Tier 2 Account, you need to have a Tier 1 Account that too active Tier 1 Account, or else you won’t be able to open Tier 2 Account.

How To Open An NPS Account

Now the question is How do you open the account? Then you visit any Bank, tell them you want to open an NPS Account. Submit your necessary documents, and your Account will be opened.

The Bank will provide you with a PRAN i.e., Permanent Retirement Account Number. Just like you have a PAN Number, likewise you will have a PRAN Number and this quite similar to EPF’s UAN Number.

That means you will have one PRAN always, and your contribution will be mapped under the same thing. And If you wish to promote Digital India, then you can open the account Online, which can be opened by visiting the ENPS Website I will mention the link in the description below. It’s a simple form, you need to fill that. Your AAdhar Number should be linked to your Mobile Number because you will receive an OTP.

And If that is so, then your NPS Account can be opened online And you will receive your PRAN at your home via courier. I hope you might have found all the information to NPS quite useful.

What is NPS | The Best Retirement Plan

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