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Essentials of National Pension System for Private Sector Employees

10 Mins 26 Jun 2023 0 COMMENT

The National Pension System (NPS) is a retirement savings scheme introduced by the government of India in 2004. It is a voluntary, defined contribution-based retirement savings scheme, which means that individuals can choose to invest in the plan to build a retirement corpus.

In simpler terms, the NPS is a way for people to save money for retirement. It is like a savings account where you can deposit money regularly, and over time, it grows with interest. On retirement, part of the money you save in the NPS can be withdrawn as a lump sum and part of this can be used to purchase annuity which offers regular income.

NPS For Private Sector Employees

The National Pension System (NPS) was opened for private sector employees on May 1, 2009. Prior to this, it was available only to government employees. This move was aimed to provide an additional retirement savings option to private sector employees and promote a culture of savings for retirement.

Since then, the NPS has become a popular retirement savings option for many private sector employees, as it offers flexibility, low charges, and the opportunity to build a retirement corpus over the long term.

How Does NPS Work for Private Sector Employees?

The NPS is open to all Indian citizens between the ages of 18 and 70. When you join the NPS, you will be assigned a unique Permanent Retirement Account Number (PRAN), which will remain with you throughout your life. You can choose how much you want to invest in the scheme and how you want to invest it. The NPS offers different investment options, including equity, corporate bonds, and government securities.

The NPS is a good option for people who want to save money for their retirement, as it is managed by professional fund managers and has low charges. It also offers tax benefits, as contributions made towards the scheme are eligible for tax deductions under Section 80C of the Income Tax Act.

Things Private Sector Employees Must Know About NPS

  1. Eligibility: Private sector employees between the ages of 18 and 70 years are eligible to join the NPS. You can open an NPS account through any Point of Presence (POP) service provider appointed by the Pension Fund Regulatory and Development Authority (PFRDA).
  2. Investment options: The NPS offers two investment options—Active Choice and Auto Choice. Under Active Choice, you can choose your asset allocation between equity, corporate bonds, government securities and alternative funds. Under Auto Choice, your investment will automatically be allocated to equity, corporate bonds, and government securities based on your age. You can switch between the two options once a year.
  3. Minimum contribution: The minimum amount you can contribute to your NPS account at one time is Rs 500. You must also make at least one contribution in a financial year (April to March) to keep your account active.
  4. Maximum contribution: There is no maximum limit on the amount that you can contribute to your NPS account in a financial year. However, tax benefits are available only on contributions up to Rs 2 lakh in a financial year. If you contribute more than Rs 2 lakh in a year, the excess amount will not be eligible for tax benefits.
  5. Tax benefits: Contributions made towards the NPS are eligible for tax deductions under Section 80C of the Income Tax Act, subject to a maximum limit of Rs 1,50,000. Additionally, you can claim an additional deduction of up to Rs 50,000 under Section 80CCD(1B).
  6. Withdrawal rules: You can withdraw up to 60% of your NPS corpus tax-free when you reach the age of 60. The remaining 40% must be used to purchase an annuity plan, which will provide you with a regular income stream for the rest of your life. You can also make partial withdrawals before the age of 60 for specific purposes such as higher education, marriage, or buying a house.
  7. Charges: The NPS charges are quite low. Fund Management Charges in NPS can be less than 0.09%. The charges being low, the benefit of accumulated pension wealth to the subscriber eventually become large.

Why Should Private Sector Employees Consider NPS?

With the changing demographic patterns and increase in life expectancy, it has become increasingly important for individuals to plan for retirement. NPS offers a cost-effective and flexible retirement savings option with tax benefits, making it a good choice for private sector employees who want to plan for their post-retirement years.

NPS offers a lot of flexibility to investors in terms of choosing investment options, fund managers, and withdrawal options. It also allows for partial withdrawals in case of emergencies. It is a portable retirement scheme, which means that an employee can continue to contribute to the scheme even if they change jobs or move to a different city.

Additionally, NPS offers tax benefits under Section 80C of the Income Tax Act 1961. An employee can claim a deduction of up to Rs 1,50,000 in a financial year by investing in NPS. Additionally, employees can claim an additional deduction of up to Rs 50,000 under Section 80CCD(1B) of the Income Tax Act.

Concluding Thoughts

NPS for private sector employees is a smart investment decision for retirement planning. The host of benefits the scheme offers makes it a viable investment instrument.

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