How
the National Pension Scheme (NPS) works:
Account
Opening: To
open an NPS account, an individual need to approach nearby bank or financial
institution, even NPS facility available in post office also. The citizen of India whose age is between 18
to 60 years can avail this scheme along with KYC documents i.e., Aadhar Card,
PAN card , address proof etc., An Individual can’t open one or more
accounts. While opening an individual
need to choose scheme for example Tier I or Tier II both are having different
conditions and advantages.
Let’s
checkout Tier I vs Tier II :
Tier
I:
Tier I account it is a mandatory or primary type of account having certain restrictions
on withdrawals, it offers accumulating savings and tax benefits
Tier
II: Tier II is a optional and more flexible
account in terms of withdrawals, an individual can apply for Tier II only if he
has already operated or have a Tier I account.
Contributions:
There is a regular basis of contributions in NPS accounts, investor can invest
their money regularly on a monthly, quarterly or annual basis. The Minimum investment required as per the
rule of Pension Fund Regulatory and Development Authority PFRDA rule to remain active.
Permanent
Retirement Account Number (PRAN): Each individuals or
NPS investors allotted a unique 12 digits Permanent Retirement Account Number,
this is a permanent account number of the investors for life time or until
account is closed.
Tax
Benefits: NPS offers tax benefits to an investors up to a
certain limit deduction under section 80CCD(1) of the Income Tax Act,
additional deduction also available for investors under section 80CCD(1B).
Withdrawals:
Investors can partially withdraw a lump sum amount at the age of 60 from his
account, rest must be used for to purchase an annuity to provide regular
pension.
Example:
Narayan the 30 year young
middle class working as a electrician decided to open an account in National
Pension Plan to secure his old age, he decided to make monthly investment in
NPS.
Contribution
Amount: Narayan decides to invest 10% of his monthly salary
that is INR 15000 in NPS account.
Asset
Allocation: Narayan chooses a risk allocation
strategy. He allocates his investment or funds as follows:
Equity : 40%
Corporate Bonds: 40%
Government Securities:
20%
Expected
Returns: Narayan expects 8% returns as per market
conditions.
Tax
Benefits: Narayan is eligible for tax benefits under Section
80CCD(1) for his NPS investment. Let's assume that he falls in the 20% tax
bracket.
Scenario 1: Retirement
Corpus Calculation (At Age 60):
Monthly NPS
Contribution: Rs.1500
Annual Contribution:
Rs. 18,000
Total Contribution over
30 years (from age 30 to 60): Rs. 5,40,000
Using the expected
annual return of 8%, here's how Narayan's NPS corpus could grow over the years:
Total Maturity at
Retirement (Age 60): Approximately Rs.
Tax
Benefits:
Tax
Benefit under Section 80CCD(1): Narayan can claim a
deduction of upto 10% of his salary under section 80CCD(1).
Additional
Deduction under Section 80CCD(1B): Narayan can also claim
an additional deduction under section 80CCD(1B).
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