The National Pension Scheme (NPS) has become a popular choice for retirement among most of the salaried employees and self-employed professionals. The NPS offers a wide range of benefits and it’s mainly designed to create a retirement corpus with small contributions.  The scheme is backed by the Central government and it’s managed by Pension Fund Regulatory and Development Authority (PFRDA).

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The National Pension Scheme can be availed by salaried and non-salaried individuals between the ages of 18 and 70. 

National Pension Scheme features and benefits

The NPS allows individuals to contribute a fixed amount on a regular basis. This contribution can be added to two different types of accounts. 

NPS Tier-1 Account: This mandatory pension account offers tax benefits and a minimum contribution of Rs 500 is needed for opening the account. An investor should contribute a minimum of Rs 6,000 per annum to NPS Tier-1 account to keep it active.  

NPS Tier-2 Account: Designed as an optional investment account, it permits withdrawals without tax benefits. There is no minimum monthly contribution to this account. 

Upon retirement, subscribers can opt to withdraw up to 60 per cent of their accumulated funds as a lump sum. The remaining 40 per cent corpus is then turned into an annuity plan to ensure a steady stream of income.

Additionally, investing in NPS offers the added advantage of tax deductions under Sections 80C and 80CCD of the Income Tax Act, 1961, making it a suitable addition for your retirement portfolio.

NPS offers flexibility of choosing funds and fund manager

Subscribers can handpick a Pension Fund Manager (PFM) to manage their investments. They can also allocate their investments across various assets and alter these allocations up to four times in a fiscal year. NPS offers diverse investment options, including the Active Choice, Auto Choice, Alternative Investment Fund (AIF) Tier I, and AIF Tier II, permitting subscribers to tailor their portfolios to align with their risk tolerance and financial objectives.

NPS tax benefits

The NPS offers multiple tax benefits under its Tier-1 Account. Subscribers can enjoy exclusive tax savings under Section 80CCD (1B) with deductions of up to Rs 50,000. Salaried employees can get tax deductions on the contribution made by their employers towards NPS. Under Section 80CCD(2) of the I-T Act, a maximum of 10 per cent of the basic salary and dearness allowance (DA) from the employer’s contribution can be claimed as deduction.

National Pension Scheme maturity and withdrawals

Upon reaching the age of 60, NPS subscribers can withdraw up to 60 per cent of the corpus fund and the rest 40 per cent is converted into an annuity plan. The lump sum amount can also be withdrawn up to the age of 75 years in phases.

A partial withdrawal of up to 25 per cent of employee contributions is permissible after a lock-in period of 3 years.

Is NPS the right option for your retirement scheme?

The NPS brings forth a set of compelling benefits while considering some limitations. On the benefits side, NPS operates with minimal charges, making it an economical choice. It accommodates varied investment choices, enabling subscribers to shape their portfolios. As the NPS is managed by Pension Fund Regulatory and Development Authority (PFRDA), it is considered to be more secure compared to other retirement plans offered by private players.

However, NPS also demands a long-term commitment, as the funds are typically accessible only at the age of 60 or 65. Additionally, as a market-linked scheme, NPS exposes subscribers to market volatility and fluctuations. Furthermore, while offering tax benefits, annuity income and substantial lump sum withdrawals may attract taxes.

While the scheme's features resonate with various investor profiles, each individual should weigh the benefits and limitations against their unique financial goals and risk tolerance. Engaging with a financial advisor can help you navigate the intricacies of NPS and align it with your broader retirement plan.