The Structure Of NPS

NPS has two types of accounts: Tier I and Tier II.

Tier I Account: This is the primary account, which is a non-withdrawable retirement account. Subscribers contribute their savings for retirement into this account. Tax benefits are applicable to contributions made to this account under Section 80C, Section 80CCD(1), 80CCD(1B) and 80CCD(2) of the Income Tax Act.

Tier II Account: This is a voluntary savings account associated with your NPS account. Subscribers are free to withdraw their savings from this account whenever they wish. However, this account does not offer any tax benefits.

The key difference between these two accounts is the withdrawal facility. While the Tier I account is strictly for retirement and doesn’t allow withdrawals until the subscriber reaches the age of 60, the Tier II account allows the flexibility of withdrawals as per the subscriber’s convenience.

Tax Benefits

One of the major advantages of NPS is the tax benefits it offers. Contributions made towards NPS are eligible for tax deductions under various sections of the Income Tax Act:

• Section 80CCD(1): The amount contributed towards NPS is eligible for a tax deduction up to Rs. 1.5 lakh under Section 80CCD(1).
• Section 80CCD(1B): Subscribers can claim an additional deduction of Rs. 50,000 on their NPS contributions under Section 80CCD(1B). This is over and above the Rs. 1.5 lakh limit under Section 80CCD(1).
• Section 80CCD(2): Employer’s contribution towards the employee’s NPS account is eligible for tax deduction up to 10% of the salary (basic + DA), without any upper cap in terms of amount under Section 80CCD(2).

These tax benefits significantly enhance the attractiveness of NPS as a retirement savings option.

1. What happens to my NPS account after I turn 60?

Once you turn 60, you become eligible to withdraw your accumulated corpus from your National Pension Scheme (NPS) account. However, the withdrawal rules of NPS mandate that you can withdraw up to 60% of the corpus as a lump sum, and the remaining 40% must be used to purchase an annuity plan from a PFRDA-empanelled insurance company.

Here’s a detailed breakdown:

1. Lump Sum Withdrawal: You can withdraw up to 60% of your accumulated corpus as a lump sum. This amount is tax-free, which means you won’t have to pay any tax on this withdrawal.
2. Annuity Purchase: The remaining 40% of the corpus must be used to purchase an annuity plan. An annuity plan is a financial product that provides a regular income (monthly, quarterly, half-yearly, or yearly) for the rest of your life. The income you receive from the annuity plan is taxable as per your applicable income tax slab.
3. Deferred Withdrawal: If you do not wish to withdraw your corpus immediately after turning 60, NPS allows you to defer the withdrawal until you turn 70. During this deferment period, your corpus will continue to be invested, potentially leading to higher returns.
4. Early Exit: In case you decide to exit NPS before turning 60, at least 80% of the accumulated pension corpus must be utilised for the purchase of an annuity, providing a monthly pension. The remaining 20% can be withdrawn as a lump sum.
5. Continuation of NPS Account: Even after you turn 60, you have the option to continue contributing to your NPS account until the age of 70, if you wish to do so.

2. Can I close my NPS account before retirement?

Premature closure of an NPS account is allowed only in specific circumstances, like serious illness or death. Otherwise, the NPS account remains active until the subscriber reaches the age of 60.

3. Is the money I invest in NPS safe?

NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which ensures the transparency and safety of the investment. However, as NPS is a market-linked product, the returns are subject to market risks.

1. Regulation by PFRDA: The PFRDA is a statutory body set up by the Government of India to regulate and ensure the orderly growth of the pension market. Your investment is safe because the PFRDA has appointed professional fund managers to manage the funds in your NPS account.
2. Market-Linked Returns: NPS invests in various asset classes such as equities, government securities, and corporate bonds. The returns on these investments are subject to market risks and can vary depending on the performance of these markets. While equities have the potential to offer higher returns, they also carry higher risk. On the other hand, government securities and corporate bonds offer more stable returns but might not yield as high returns as equities.
3. Risk Diversification: NPS follows a diversified investment approach, spreading your investments across different asset classes. This diversification helps to mitigate risk and stabilise returns over the long term.
4. Choice of Investment Option: NPS offers different investment options and allows you to choose the one that best suits your risk profile. If you are risk-averse, you can opt for a conservative investment strategy with a higher proportion of your funds invested in government securities and corporate bonds. If you are willing to take more risk for potentially higher returns, you can opt for an aggressive investment strategy with a higher proportion of funds invested in equities.

4. Is NPS a good option for retirement savings?

NPS can be a good option for retirement savings due to its market-linked returns, tax benefits, and flexibility. However, it’s important to consider your individual financial situation, goals, and risk tolerance before deciding if it’s the right retirement plan for you.

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