NPS is a retirement planning scheme that the Indian government introduced in 2004. It is a contribution-based, voluntary retirement savings plan that individual may choose to invest their funds and build wealth for their post-retirement years. Simply put, investors may save money in this scheme to have a financially stable life after retirement. Like a savings account, investors deposit money in the scheme account, and the funds grow over time with interest. Upon retirement, they can withdraw up to 60% of the accumulated corpus in a lump sum and invest the remaining 40% in an annuity to receive a regular monthly pension.
Although the National Pension Scheme is open to all individuals, government sector, and private sector employees, here’s a look at the scheme for private sector employees.
Accessibility of NPS for Private Sector Employees.
Although the government introduced the scheme in 2004, it became available for private sector employees in May 2009. Before that, only government sector employees were eligible for it. Its access to private sector employees provided them with a retirement planning option and promoted the habit of saving money for retirement. Since then, the scheme has become a popular retirement planning option for employees working in the private sector due to its low charges, flexibility, and opportunity to build a retirement corpus.
Working of NPS for Private Sector Employees
The NPS scheme is open to every Indian citizen between 18 and 70 years of age. When subscribers join the NPS, they receive a unique Permanent Retirement Account Number (PRAN) that remains valid throughout their life. Private sector employees can choose the amount to invest in the scheme according to their financial capacity and retirement goals. The NPS offers various investment options, from corporate bonds and equity to government securities.
The NPS is an ideal retirement planning option for investors, as professional fund managers manage the scheme at very low charges. Moreover, it offers significant tax benefits under different sections of the Income Tax Act.
Important NPS Pointers for Private Sector Employees
Here are a few pointers private sector employees must know regarding NPS investment:
Who is Eligible?
To join the National Pension Scheme, a private sector employee must be between 18 and 70 years old. Those who want to know how to invest in NPS must remember that they must create an NPS account with a PFRDA-appointed Point of Presence (POP) service provider.
What are the Investment Options?
Under the National Pension Scheme, investors have two investment options: Auto and Active Choice. Under Auto Choice, fund managers allocate the subscriber’s investment to government securities, corporate bonds, and equity according to age. Under Active Choice, subscribers can choose their asset allocation between fund options. Investors can switch between the two options once a year.
What are the Minimum and Maximum Contributions?
The minimum contribution amount at a time is Rs. 500, and the subscriber must make at least one contribution in a year to keep the account active. However, there are no maximum limits for NPS contributions. However, tax benefits are available for contributions up to Rs. 2 Lakh only annually. The excess amount is ineligible for tax advantage.
How Does NPS Help Save Taxes?
NPS contributions are eligible for tax deductions of up to Rs. 1.5 Lakh under Section 80C and an additional deduction of up to Rs. 50,00 under Section 80CCD(1B). The 60% lump sum withdrawn at maturity is also tax-free.
What are the NPS Withdrawal Rules?
At retirement, subscribers can withdraw up to 60% of their accumulated NPS in a lump sum and purchase an annuity plan with the remaining 40%. The investment in an annuity provides a regular pension for the rest of the investor’s life. Partial withdrawals before maturity are also possible before retirement for specific purposes like marriage, home purchase, medical emergency, or higher education.
What are the Applicable Charges?
Applicable charges for the National Pension Scheme are negligible. Apart from a one-time registration charge of Rs. 400, minimal charges for contribution processing, e-NPS, non-financial transaction processing, etc., also apply. The low charges benefit the subscriber by enlarging their accumulated pension.
Significance of NPS for Private Sector Employees
With improving healthcare and increasing life expectancy in India, exploring retirement planning options has become more important than ever. Since private employees don’t have stable employment with regular pensions, NPS offers them a flexible and cost-effective retirement planning instrument with lucrative tax deductions. Moreover, NPS offers flexibility in choosing investment and withdrawal options, fund managers, and asset classes. The best part is that it is a portable scheme that stays with the investor with changing jobs and cities.
The National Pension Scheme is a smart investment and retirement planning option for private sector employees. Its multifaceted benefits make it a viable instrument for retirement savings, corpus building, and tax savings.
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