National Pension System

National Pension System

Getting Started With National Pension Scheme (nps)
Retirement planning is one of the most common goals among working professionals. After all, comfortable post-retirement life is only possible if you start planning for it as early as possible. For salaried employees and professionals, the government has introduced the National Pension Scheme (NPS) to help them start saving for and investing towards their retirement. The reasonable annual returns, tax savings, fund manager selection flexibility, and long-term growth features of NPS make it an excellent choice for every person serious about their retirement.
If retirement planning is on your mind, here is a detailed guide to help you understand what NPS is.

What Is Nps?
The NPS scheme was introduced by the government, under PFRDA (Pension Fund Regulatory and Development Authority), in 2004 as a social security initiative for government employees. In 2009, it was made open to all the citizens of the country aged between 18 and 60 years. It is a voluntary pension scheme available for employees from the private, public, and even unorganised sectors. Even employers are eligible to contribute to the NPS account of the employees. Also, while the scheme is targeted towards salaried employees, it is open for self-employed professionals too.

How An Nps Account Works
The basic functioning of NPS is as follows:

Employees or self-employed professionals open an NPS account and then start depositing a fixed sum of money regularly throughout their working years. After retirement, the account holder is allowed to withdraw a certain portion from their NPS account as a lump sum amount. The rest is compulsorily given as a regular annuity (pension).

Types Of Nps Accounts
There are two types of NPS accounts - Tier I (mandatory) and Tier II (voluntary). The most significant difference between the two is the withdrawal restriction. You are allowed to withdraw the entire NPS corpus on retirement from a Tier I account. However, this withdrawal is only possible if you meet certain conditions.
You are free to withdraw the entire NPS corpus if you have a Tier II account. Note that the tax benefit under Section 80CCD (1B) is only available for the Tier I account. INVESTMENT CHOICES AVAILABLE FOR NPS INVESTORS

One can select between Active Choice and Auto Choice. Within the Active Choice, the subscribers can build their portfolio among three asset classes:

Equity (E)-
The Equity class can deliver the highest returns, but it also comes with the highest level of risk.

Corporate Bonds (C)-
Investments are made in fixed income corporate bonds. Returns are lower than Equity, but the risk is low.

Government Securities (G)-
Only invests in government-backed securities. Lower returns but minimum risk.

The Auto Choice includes the Life Cycle Fund. If you don't select any of the asset classes from above, your account will be automatically treated as a Life Cycle Fund. Here, your investment will be divided into pre-fixed proportions based on your age.
For instance, the Equity (E) exposure will be high when you are young. The portfolio will be shifted towards safer Corporate Bonds (C) and Government Securities (G) as you age.

Tax-savings With Nps
The contribution made by the employee, and the employer's contribution (if any) are eligible for a tax deduction up to Rs. 1.5 lakhs in a financial year.

Employee Contribution
The contribution made by the employee is eligible for tax deduction under Section 80CCD(1). The maximum deduction under this section can be up to 10%