Social Security – NPS targets Pension for all

Planning for retirement has always been one of the cornerstone of financial planning. Who wouldn’t like to lay back on an armchair on the beachfront with account topped up 1st of every month. National Pension Scheme (NPS) was launched with the aim to offer just that.

So, What is NPS?

The Pension scheme was introduced by the Government to extend old age security for the people. Besides provident funds, this scheme is yet another long-term savings avenue for your retirement. NPS offers safe yet market-linked returns to the people through professionally managed pension funds.

Professional, who?

Needless to say that you should know exactly where you’re putting your money. National Pension System Trust (NPST) established by Pension Fund Regulatory and Development Authority (PFRDA), owns all the assets under NPS. PFRDA is responsible of regulating the scheme. It has few private partners too to manage the fund.

Who can subscribe for the scheme?

Before going further, you should know whether you will be able to opt for the scheme. Every Indian citizen including an NRI (Non-Resident Indian) aged between 18 and 60 years can subscribe for this scheme.

Types of Accounts

NPS offers two types of accounts, namely Tier-I and Tier-II. The features offered under the accounts can be simplified:

TierI Account: It is a mandatory retirement account. The amount in this account cannot be freely withdrawn at any time. Some restrictions are imposed in withdrawals. For the contributions made in this account, subscribers are allowed up to ₹ 50,000 as deductions from tax.

Tier-II Account: It is a voluntary saving account associated with your Tier-I account. It offers greater flexibility in terms of withdrawal. You can withdraw from your Tier-II account at any point of time.

Minimum Contribution

There is a minimum contribution that a subscriber must make to keep the account active. And this limit varies with account type.

Details on minimum contributionTier-ITier-II
At the time of account opening₹ 500₹ 1,000
Subsequent monthly contribution amount₹ 500₹ 250
Contribution per year₹ 1,000         –  
Number of contributions in a year1         –  
Minimum Contribution in Tier I and Tier II accounts

How it works?

Government Model: Applicable only to Central and State Government employees who make a monthly contribution 10% of the salary. The Govt. contributes 10% of the salary along with the employee. From 2019, it contributes as high as 14% of the salary in case of central govt. employees. This has replaced traditional pension scheme offered by yesteryear governments.

NPS Government  Model and the tax benefits available in NPS
Structure of Government Model and the tax benefits in NPS

Corporate Model: This model is the customized version of NPS to suit various organizations where the employees can NPS as an organized entity. Entities registered under the Companies Act can opt for this model.

All Citizens Model: The All Citizens Model of the NPS allows all citizens of India aged between 18 – 65 years to join NPS on voluntary basis.

How do I get the money?

When you attain the retirement age of 60 years, you can exit from the scheme. You can withdraw the money in lump-sum up to 60% of the accumulated amount (tax free, btw). The remaining 40% must be used to purchase annuity which pays regular monthly pension post retirement (tax free again). This gives an assured source of income for the people during their retirement days.

If you exit the pension scheme under any other circumstances, then the ceiling on such lump sum withdrawal will be capped at 20% and this will be subject to taxation.

You can make partial withdrawal from their NPS contribution. However, you should’ve been in the scheme for at least 3 years. The maximum limit for such withdrawal is 25% and this is again tax free.

Besides this, the subscribers are given a few investment choices to decide on where to put their money and how to diversify. One can freeze asset allocation ratios as well. But let’s save it for later.

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