National Pension Scheme Explained
Published On Aug 28, 2021
Table of Contents
When it comes to welcoming financial security at an old age, pension plans are highly sought after. Pension plans ensure that the elderly live a life of respect and dignity after their retirement as well. The Government of India understands how difficult it can be for senior citizens to manage their financial stability post-retirement. In an effort to provide social security to the elderly, the government came up with the National Pension Scheme.
What Is the National Pension Scheme?
Launched on 1st January 2004, National Pension Scheme is a voluntary, long-term investment plan for retirement. The National Pension Scheme or NPS is under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) as well as the Central Government. A popular social security initiative by the Central Government, National Pension Scheme was introduced to inculcate the habit of saving for retirement among the citizens of India.
Who Should Invest in the National Pension Scheme?
The National Pension Scheme or NPS is advised to anyone who wants to plan their retirement early in life. It is also for anyone who has a low-risk appetite. Individuals retiring from private-sector jobs must opt for the National Pension Scheme as they can enjoy a regular pension (income) in their retirement years. NPS is also a good option for salaried people who want to gain the benefit of 80C deductions.
Features & Benefits of National Pension Scheme
The list includes:
- Returns/Interest: A part of the NPS is dedicated to equities, which may not provide guaranteed returns. Nonetheless, it offers returns quite higher as compared to other traditional tax-saving investments. By far, the annualized returns delivered by NPS range between 8% to 10%. What’s best is that in NPS, an individual can also change their fund manager if they feel unhappy with their fund’s performance.
- Risk Assessment: At present, the National Pension Scheme allows a maximum of 75% investment in equities. The cap for government employees is 50%. In other words, the risk-return equation is stabilized in the interest of investors, thereby helping their corpus to be safe from the volatility in the equity market.
- Tax Efficiency: A deduction of up to Rs. 1.5 Lakh can be claimed for NPS for their contribution as well as their employer’s contribution. It must be noted that 80CCD(1) covers self-contribution that is a part of Section 80C. The maximum deduction an individual can claim under 80CCD(1) is 10% of their salary. For taxpayers who are self-employed, the limit is 20% of the gross income. An individual can claim any additional self contribution (up to the limit of Rs. 50,000) in adherence to section 80CCD(1B) in the form of NPS tax benefit. Overall, it can be said that NPS allows a tax deduction of up to Rs. 2 Lakh in total.
How to Open a National Pension Scheme Account?
PFRDA regulates the NPS operations. An individual can open their NPS account either through online mode or offline means. With the offline mode, a PoP – Point of Presence will be required. However, in the online mode, one can visit the eNPS - NSDL website.
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.