7 Things You Should Know Before Investing in NPS

Understanding the National Pension System (NPS) is crucial for anyone considering investing in their retirement. This blog discusses seven key aspects of NPS that every potential investor should know, ensuring informed decision-making for a secure financial future.

A Brief Overview of the National Pension System (NPS)

The National Pension System (NPS) is a voluntary retirement savings scheme initiated by the Government of India in 2004. It aims to provide citizens with a structured way to save for retirement, thereby addressing the growing need for adequate retirement income. The system is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which ensures that subscribers' interests are safeguarded and that the scheme operates transparently and efficiently.

Understanding NPS before investing is essential as it allows individuals to grasp the nuances of the scheme, including eligibility criteria, types of accounts, investment options, tax benefits and withdrawal rules. This knowledge empowers investors to make choices aligned with their financial goals and retirement planning needs.

What is National Pension System (NPS)?

National Pension System is defined as a market-linked defined contribution pension scheme designed to encourage individuals to save for their retirement. Initially targeted at government employees, it has since evolved to include all Indian citizens aged 18 to 70, not Minor below the Age 18 years are also included under NPS Vatsalya. The scheme allows subscribers to invest regularly during their working life, building a corpus that can be accessed upon retirement.

1. Eligibility Criteria

Before investing in National Pension System (NPS), it's important to understand the eligibility requirements:

Age Requirements: Any Indian citizen aged between 18 and 70 years can open an all Indian citizen NPS account.
Categories: The scheme is open to both residents and NRIs.

2. Types of NPS Accounts

NPS offers two main types of accounts:

Tier I Account: This is a mandatory primary retirement account with restrictions on withdrawals. It is primarily aimed at accumulating funds for retirement.
Tier II Account: This is a voluntary account that allows more flexibility regarding withdrawals. Subscribers can withdraw funds at any time, making it suitable for those seeking liquidity.

3. Investment Options and Asset Classes

NPS provides various investment options across different asset classes:

Equity (E)
Corporate Bonds (C)
Government Securities (G)
Alternate Assets (A)

Investment Choices

Active Choice in the National Pension System (NPS) allows subscribers to control their asset allocation across different classes, with equity capped at Upto75%.

Allocation Limits:

Equity (E): Up to 75%
Corporate (C): Up to 100%
Government (G): Up to 100%

Auto Choice based on risk tolerance has four Life Cycles Fund Options

Aggressive Life Cycle Fund (LC 75)
Moderate Life Cycle Fund (LC 50)
Conservative Life Cycle Fund (LC 25)
Balanced Life Cycle Fund (BLC)

4. Tax Benefits

One of the significant advantages of investing in NPS is the tax benefits it offers:

Section 80C: Up to ₹1.5 lakh annually under old tax regime
Section 80CCD(1B): Exclusive tax benefits under old tax regime upto to Rs. 50000 under section 80 CCD (1B) in addition to Rs. 1.5 lakhs under 80C.
Section 80CCD(2): If your employer contributes to your NPS account, you can claim a deduction under section 80CCD(2). There is no monetary limit on how much you can claim, but it should not exceed 10% of your (basic salary + DA) under the old regime and 14% of your (basic salary + DA) under the new regime. It is subject to a ceiling of Rs. 7.50 lakhs.

These tax benefits enhance overall returns on investment, making NPS. an attractive option for retirement planning.

5. Withdrawal Rules and Retirement Benefits

Understanding withdrawal rules is crucial for effective financial planning:

Partial Withdrawals: Subscribers can make partial withdrawals under specific conditions before retirement.
At Retirement: Upon reaching retirement age, subscribers must use at least 40% of their accumulated corpus to purchase an annuity. The remaining amount can be withdrawn as a lump sum.

These rules ensure that subscribers have access to funds while also promoting long-term saving habits.

6. Annuity

An annuity means the regular monthly income you receive after retirement by investing a portion of your NPS corpus by Annuity service providers

There are various types of annuities available:

Annuity for Life with ROP
Joint Life Annuity with ROP
NPS - Family Income with ROP
Annuity for Life without ROP
Joint Life Annuity without ROP

ROP - Return of Purchase Prive

7. Portability and Flexibility

NPS stands out due to its portability and flexibility.

Portability Across Jobs: Subscribers can transfer their NPS accounts when changing jobs or locations without losing benefits.
Flexible Contributions: Investors have control over their contributions and investment choices, allowing them to adapt their strategies based on changing financial circumstances.

This flexibility enhances long-term retirement planning by accommodating life changes without compromising on savings goals.

Conclusion

Investing in the National Pension System can be a wise decision for securing your financial future post-retirement. By understanding its structure—eligibility criteria, account types, investment options, tax benefits, withdrawal rules, annuities and portability—you can tailor your investment strategy according to your personal financial goals. As you consider your options, take time to evaluate your unique circumstances and plan accordingly for a comfortable retirement.

Visit your nearest UTI Pension Fund branch or www.utipension.com to open your NPS Account today. For more assistance get in touch with us at contact@utipf.co.in and our team will be happy to assist you at the earliest.