What is National Pension Scheme & its Benefits

NPS or National Pension Scheme is a government initiative started in 2004 for all government employees, which is now open to everyone from 2009. The system is a government-sponsored pension scheme that allows subscribers to contribute a portion of their income in a fund for their retirement. At the time of retirement (usually 60 years of age), the pensioner can withdraw a corpus in a lump sum and use the rest of the amount to buy an annuity to supplement a regular source of income after retirement. 

 

Benefits of National Pension Scheme:

Apart from a comfortable life after retirement, there are several NPS benefits of applying to Atal Pension Yojana Scheme.



  1. Flexibility & liquidity with two different account 

The NPS allows individuals to make systematic investments with either of the two account types available. 

Types of Accounts under NPS are: Tier I & Tier II

  • The Tier I account is a pension account with specific regulations for withdraws of your funds. To open a tier I account, a subscriber must deposit a minimum of Rs. 500. 
  • For Tier-II accounts, the minimum deposit is Rs. 250. As a voluntary pension account, Tier 2 is more flexible in terms of withdrawals and liquidating the investments if needed. 
  • For opening a National Pension System account, a unique PRAN i.e. Permanent Account Number is issued to each subscriber. 

 

You can apply for both Tier 1 & Tier 2 National Pension Accounts with Alankit. With 25+ years of industry experience in the investment market, the experts at Alankit offer you some of the best and most profitable investment options. 



2.            Flexibility of investment

The NPS or atal pension yojana subscribers can opt for the following two investment options: 

Auto choice

By default, subscribers are provided with an auto-option. Here, fund managers are automatically assigned to an investor based on their persona. The fund managers are responsible for investment funds and have control over which fund to invest in. 

 

Active choice

Under this option, individuals have the flexibility to choose their fund managers and investment options. NPS subscribers are free to decide among the available asset classes for their investments. They can also allocate different percentages of contributed funds to be invested in with a maximum cap of 50% for Asset Class E or Equities. Other Asset Classes include Class C, i.e., Corporate Debt Securities and Class G or Government Securities.

While it may be easy to change their investment portfolio and fund manager under active choice, there are certain constraints on the same too.

 

3.           Option to make a partial withdrawal

The National Pension Scheme benefits also allow you to withdraw its contributions partially. It gives individuals partial accessibility to the funds they have painstakingly saved over the years. This allows subscribers to meet their financial needs before retirement, especially during emergencies.

As per the rules regarding partial withdrawal, up to a maximum of 25% withdrawal is allowed to a subscriber from their NPS Tier I account. 

Withdrawals are, however, subject to the following clauses:-

  • Contributions up to a minimum of 10 years must be made, before a partial withdrawal
  • A a minimum gap of 5 years is stipulated between two consecutive withdrawals

Tax Benefits from National Pension Scheme 

NPS enables you to enjoy a comfortable retirement period after 60 years of age. However, it offers some good tax benefits too.

 

Applicable Sections under the Income Tax Act 1961

Tax Benefits Allowed

U/S 80CCD (1)

Own contribution of a subscriber towards Tier I investments tax-deductible within the total the ceiling of Rs.1.5 lakh u/s 80C.

U/S 80CCD 1(B)

In addition to deductions under section 80CCD (1), subscribers are allowed up to Rs.50,000 as deductions towards Tier I contributions.

U/S 80CCD (2)

Contribution of an employer towards Tier I investments is eligible for deduction up to 14% for central government contributions and up to 10% for others. This deduction is over and above the deduction limit applicable u/s 80C.


 Other tax benefits on NPS Tier I investments include:–



  • Up to 25% of your Tier I contributions are exempt from taxes
  • Annuity purchase from the corpus of your National Pension Scheme is tax-exempted. However, increment in income from such annuity in the following years is taxable.
  • After a subscriber turns 60, lump-sum withdrawal of up to 40% of an NPS corpus is exempt from tax.

 

In simple words, after 60 years of age if the total corpus created through NPS is Rs. 20 Lakh, a lump sum withdrawal of 40%, i.e. Rs. 8 lakhs will not attract any tax. Furthermore, if you make an annuity purchase from the remaining 60% of funds, the entire corpus will be tax-free. Only the income generated from the annuity will be taxable. 

Source of news - https://rashmi-joshi-57430.medium.com/what-is-national-pension-scheme-its-benefits-c10e29105c24

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