The National Pension Scheme or NPS is open to all employees regardless of the sector they are working in. Besides, allowing one to save a retirement corpus, the NPS helps save 10% of the basic salary from tax deductions. Standing today, it is a voluntary scheme where you can select the pension fund managers of your choice. You can start with a minimum monthly contribution of only Rs. 500. Read on to learn in detail about NPS for experienced professionals.
Understanding NPS and Its Importance
The National Pension Scheme is a low-cost retirement plan through which you can secure regular income after retirement. It is available for private sector employees as well as for government workers/ staff aged between 18 and 65 years.
How NPS Works?
The NPS rules for experienced professionals vary across the type of account chosen. For instance, you can select between the Tier-1 or Tier-2 NPS accounts where enrollment under the first option is mandatory as you register as a subscriber.
There is no interest fixed for both accounts as the returns are linked to secondary market movements. However, the Tier-1 contributions are totally tax-free. You can maintain this account with a minimum annual contribution of Rs. 1000.
On receiving your contributions, the selected fund manager allocates the money among various asset classes. Depending on the performance you may expect compound interest returns ranging between 8% and 10%. To ensure the contributions manage the best interests of the subscribers, the PFRDA oversees the entire process.
You can even opt for more active involvement by not choosing the auto-choice option for an NPS account. Upon doing so, you are provided with the right to specify how much investment should go towards government securities, corporate bonds, and equity instruments.
What are the Tax Benefits Associated with NPS?
There are several benefits of NPS for experienced professionals that motivate them to invest in NPS. One such advantage is that they become eligible for income tax deductions of up to 10% of their salary. For this, their employer needs to mark that particular salary component as a business expense. This norm is applicable to all professionals as per Section 36(1) of the Income Tax Act.
How Does NPS Help in Securing a Monthly Pension?
For regular monthly payouts, you must subscribe to an NPS annuity plan by utilising at least 40% of the corpus accumulated. This decision needs to be taken at the time of maturity.
You must note that all the capital gains and contributions towards an NPS account are tax-free.
You can choose any of the PFRDA-approved annuity scheme providers to start the pension service. By doing so you can ensure immediate disbursements as pension and can avert the risk of re-investing.
Exploring the Different Aspects of NPS
The advantages of NPS for experienced professionals are immense as it secures excellent returns and serves as a crucial tax-saving instrument. Also, when you open a Tier-2 account, there is no such lock-in period. Most importantly, the historical returns are very satisfactory and have managed to beat inflation consistently.
What are the Types of NPS Accounts Available?
While you are exploring NPS for experienced professionals, you will primarily come across two different account types - Tie-1 and Tier-2. The first one calls for a minimum contribution of Rs. 500 at the time of account opening while the second account type requires a minimum initial deposit of Rs. 1000.
Any Indian who’s aged between 18 and 65 years can open an NPS Tier-1 account either online or offline. For a detailed account opening guide, please click here.
Online applications are processed instantly and your balance gets immediately reflected as you search entering the Permanent Retirement Account Number (PRAN). While the Tier-1 account offers tax benefits of up to Rs. 2 Lakhs in a year, it comes with a lock-in period where you cannot withdraw before 60 years.
On the other hand, the Tier-2 account (that can be initiated only by existing NPS subscribers) does not have any lock-in period. NPS subscribers can voluntarily add funds to this account to generate a substantial retirement corpus. Also, there are no such restrictions regarding asset allocation for Tier-2 accounts.
How Can One Calculate the Pension Amount Using an NPS Calculator?
Online NPS calculators are tools that consider multiple parameters like the investor's age, monthly contributions, investment strategy, etc. to give results. As a result, you get the potential NPS maturity amount.
Here you can see the generalised steps to use an online NPS calculator:
Step 1: Enter the monthly investment amount
Step 2: Pick a growth rate or select an investment strategy (moderate, conservative or aggressive)
Step 3: Put your age in the relevant field
Step 4: Click on ‘Calculate’ to get the final maturity amount along with the sum invested and the interest gained
Investing and Managing NPS Accounts
The NPS scheme is designed for systematic savings. You can access this facility from anywhere in India. For existing pension holders, a fresh application is necessary to register under this scheme.
Here we have broken down NPS for experienced professionals from the application process to withdrawal methods:
What are the Steps to Open an NPS Account for a Working Professional?
To open an NPS account please follow these steps:
Step 1: Visit the page of the National Pension System and click on ‘Apply Now’.
Step 2: Fetch the online registration form and enter the acknowledgement number and date.
Step 3: Enter the personal details and nomination details, and upload the signature, bank statement and passbook copy.
Step 4: Make the initial deposit (it should be at least Rs. 500)
Step 5: Confirm the details, enter the CAPTCHA code and click on ‘Submit’.
Step 6: Collect the 12-digit PRAN for further use.
How to Effectively Manage and Monitor NPS Investments?
To manage and track the NPS balance you can follow this procedure:
Step 1: Navigate to the official website of the National Pension System.
Step 2: Enter the PRAN as a user ID and complete the login by inputting the password.
Step 3: Fill in the CAPTCHA.
Step 4: Click on ‘Holding Statement’ after navigating to the ‘Transaction Statement’ segment.
Step 5: Check the balance and particulars displayed on your screen.
What are the Options Available for NPS Withdrawals and Pension Disbursement?
Every NPS subscriber is allowed to withdraw a maximum of 3 times throughout the entire tenure of maintaining an account. After 3 years, you can withdraw up to 25% of the contribution. It is applicable for Tier-1 accounts as Tier-2 accounts do not have any such lock-in period.
After the maturity period, you can withdraw 60% of the corpus as a lump sum and opt to buy an annuity plan with the rest 40%. If you wish you can even increase the contribution towards annuity to get a higher pension amount each month.
Decision-Making and Future Planning with NPS
When you assess the tax benefits under Section 80C of the Income Tax Act, you straightaway realise the advantages of NPS for experienced professionals. Not only does it allow subscribers to save Rs. 1.5 Lakhs but also you may opt for an additional savings of Rs. 50,000 under Section 80CCD(1B).
Also, the NPS is very flexible in terms of capital allocation. You get complete control if you go for the active choice option. Thus, you yourself control future planning and the choice of annuity also depends on your decision.
How Does NPS Cater to Varying Needs of Working Professionals in Different Sectors?
For employees working in government offices, the NPS program is in no way different from corporate workers. Both get the freedom to invest in Tier-1 and Tier-2 accounts. After successful registration, the account holder can claim up to Rs. 2 Lakhs of tax deduction in a financial year. Also, they do not have to maintain any upper cap in terms of yearly investment.
All professionals can withdraw up to 25% of their investments after 3 years of maintaining the account. It can help them meet any emergency expenses or fulfil a lifelong aspiration like buying a house.
Therefore, depending on your goals you can start investing in NPS as the structure falls under the EEE category. Also, the investment opportunities are robust allowing you to flexibly determine the allocation patterns. Most importantly, they provide higher returns compared to PPFs and FDs.
What are the Long-term Benefits of Subscribing to NPS for Retirement Planning?
Some long-term benefits of NPS for experienced professionals include:
1. Attractive Returns
No other tax-saving instrument provides as much returns as NPS. Therefore, most people consider Tier-1 and Tier-2 NPS as significant wealth accumulation schemes.
2. Calculated Risk
Even if you go for the auto-choice NPS, the PFRDA ensures that your risk profile is taken care of. They do this by specifying the upper limit of contribution allocation towards equity assets. As you grow old the fund managers shield you against market volatility by minimising the equity exposure.
3. Increased Flexibility
You are allowed to contribute to your NPS account at any time of the year. Also, you can enjoy the flexibility of determining the portion of your fixed income you desire to invest in this scheme. All these features complement your long-term investment objectives.
| Simplify your NPS contributions and optimize your investment strategy – learn more with our detailed guide. |
Conclusion
Whether you pick NPS for experienced professionals or for new-age individuals, the scheme is advantageous to all age groups as it allows systematic wealth generation. Thus, starting from salaried professionals to tax-conscious investors, many prefer contributing to this scheme. The greatest relief is that it is backed by the Central Government. So you can leverage equity-generated returns without going through research-intensive strategies.
- Kakoli Laha
