The National Pension Scheme (NPS) or also known as the National Pension System is open to all the employees from the public sector, private sector, and the unorganised sector except for those who work in the Armed Forces.
It is a long-term investment plan for retirement under the regulations of the Pension Fund Regulatory and Development Authority (PFRDA) and central government.
The scheme was launched in order to promote and encourage investing in a pension account at regular intervals during the entire period of their employment. After retirement, the subscribers can take out a certain percentage of the corpus. An NPS account holder will also receive the remaining amount as a monthly pension post their retirement.
Earlier, the NPS scheme was only open to the central government employees, however, now the PFRDA has made it open to all Indian citizens on a voluntary basis.
The NPS scheme requires its subscribers to invest in market-linked instruments like equity and debt and the return depending on the performance of these investments. The current interest rate of NPS is 8-10% on the contribution made.
An Indian citizen between the age of 18 years and 60 years can open their NPS account. As regulated by the PFRDA, the National Pension Scheme matures at the age of 60 years and can be extended to 70 years, the NPS also allows subscribers to withdraw up to 25% of the contribution after 3 years of opening the account in very specific situations like sponsoring a child’s education, purchasing a home, or the treatment of a critical illness.
Benefits of the scheme
It is important to understand the benefits of the NPS before investing in it. Some of its advantages are listed below:
- NPS tax benefit
The contributions made towards the NPS scheme up to the maximum limit of Rs 1.5 lakhs is eligible for tax exemption under Section 80C of the Income Tax Act. On top of this, in the NPS, the contribution made by the employer and the employee are both exempted from taxation
A portion of the contributions made towards the NPS scheme is invested in equities, which offers higher returns as compared to other traditional tax-saving investment options like PPF. Along with an interest rate of 9-12%, this plan is best suitable for those individuals who want to accumulate funds in the long-term and financially secure life after their retirement.
- 60 withdrawal rules
According to the NPS scheme, the individual cannot withdraw the entire accumulated fund from their NPS account after retirement. It is mandatory to keep aside a minimum of 40% of the accumulated fund to receive a regular annuity from the PFRDA registered insurance firm. The rest 60% of the accumulated fund is exempted from tax
- Exit rules and premature withdrawals
As a pension scheme, it is compulsory to invest in NPS until 60 years of age. However, partial withdrawal is allowed after 3 years from the date of opening the NPS account. The subscribers can withdraw from the account 25% of the total contribution made.
Premature withdrawal is also permitted for special situations like a child’s education, purchasing a house, medical emergency, etc. The account holder can withdraw prematurely only 3 times in the interval of 5 years of the entire tenure.