Are you an aggressive saver, shrewd investor, or on a journey towards wealth creation, whatever your investment style is, the National Pension Scheme (NPS) offers excellent opportunities you wouldn’t want to overlook. In the past decade, NPS has gained popularity among individuals of all ages due to its investor-friendly features and flexibility. With the increasing awareness of retirement planning and a rising number of salaried investors embracing early retirement, the subscriber base of NPS is growing rapidly.

This blog aims to provide you with enough information on NPS, the process of signing up, its benefits, the paperwork, returns, and withdrawal details associated with this scheme.

Benefits of NPS

The NPS is an integrated investment and pension plan that has a plethora of benefits that you would want to take advantage of. Let us look closely and see how it can be beneficial to your financial plans:

Income Generation

NPS is a source of income after retirement particularly for those of you who work in the private sector. The scheme encourages employees to invest in a pension account regularly throughout their careers. Upon retirement (at the age of 60 years), subscribers can withdraw a certain proportion of their corpus, and the remaining will be received as a pension payout after their retirement.

Tax Breaks

The tax breaks of NPS are unmatchable among all other pension schemes. Subscribers who have already utilized the ₹1.5 lakh tax deduction under section 80C can further reduce their tax liability by contributing an additional ₹50,000 under section 80CCD.

Flexibility

Individuals who have signed up for the scheme have the flexibility to modify their asset allocation up to four times each year. Additionally, they can invest in diverse funds managed by varied fund managers including HDFC, ICICI or Axis. One can also opt for one of the three Lifecycle funds that dynamically adjust the asset mix as they get older.

Market Linked Returns

The ROI of NPS is based on how it performs in the stock market. Though these investments carry market risks its returns are mostly higher than the traditional debt instruments like FDs or PPF. It is strictly regulated by the PFRDA so the chances of malpractice are almost negligible.

Opening an NPS or Permanent Retirement Account Number (PRAN) Account

Online:

It is very quick and easy to open a PRAN account online. To register for NPS, visit enps.nsdl.com, choose document type (Aadhaar, PAN, or Digi locker), and select application type and residential status proceed Be careful in choosing the account type (Tier 1, Tier II, or both) and provide details. Tier 1 offers tax benefits and Tier II offers more flexibility. Select pension fund managers and investment options, and do not miss to enter nominee information. Authenticate the relevant details and finally download the PRAN card with the unique 12-digit number.

Offline:

To open an NPS account, visit the POP-SP (POP-Service Provider), which is the branch network providing NPS services. Fill out the registration form and submit it with mandatory KYC documents and initial contributions. Your application will be sent to CRA (Central Record Keeping Agency) for PRAN and they will provide the account details and password to access the PRAN account.

Essential Documents for PRAN

The Mandatory documents that need to be submitted for PRAN:

• Recent photograph
• Proof of identity – Aadhaar, Passport
• Proof of address – Voter’s id, driving license, Telephone bill, electricity bill
• Age/ date of birth proof – PAN Card or passport
• Overseas citizens will need to furnish their OCI card

Knowing NPS accounts Tier1 and Tier II

NPS offers two account types for subscribers:

Tier 1:

The primary retirement account with withdrawal restrictions is designed for long-term planning and tax benefits. Withdrawals from this account are allowed at retirement (at 60 years) or under specific circumstances.

Tier II:

This account provides flexibility in withdrawals and is suitable for short-term goals. However, you will not get any additional tax benefits.

Tier 1 vs. Tier II:

When comparing the two account types, it is important to consider their distinct features. Tier II gives higher returns, but it is relatively riskier than Tier 1, while Tier 1 follows a conservative approach for lower risk. On the other hand, Tier 1 offers higher long-term benefits including tax benefits, while Tier II provides liquidity benefits. Choosing between them depends on goals, risk tolerance, and liquidity needs. Based on past subscriber behavior Tier 1 is much preferred for retirement planning and tax benefits, over Tier II.

How to build your NPS retirement corpus?

To build a successful NPS retirement corpus, it is important to start saving early and make consistent contributions. Choose investments that best match your risk tolerance and desired outcomes, taking inflation into account. As your income grows, be sure to top up your portfolio accordingly. Make sure you regularly readjust your portfolio and adjust your investment strategy depending on life goals while staying abreast of market trends. Gradually increase the amount you are investing in order to maximize growth opportunities.

Return on NPS

The returns you generate from NPS will be dependent upon the performance of the account type and market performance, making it advantageous to start investing earlier for the potential growth of your retirement corpus.

Withdrawal choices in NPS

Withdrawal rules differ between the two Tier accounts. Tier 1 has more restrictions, while Tier II allows withdrawals at any time. Tier 1 is considered more complex but offers tax benefits. Tier II is voluntary and provides flexibility. To begin, contribute at least 10% of your salary to Tier 1, and consider Tier II as a supplement. Keep in mind that you cannot withdraw the entire NPS corpus at once; one portion is allowed to be withdrawn while the rest of the corpus needs to be used to purchase an annuity that pays regular installments.

Conclusion

Now that you know the real advantages of NPS, it is safe to say that it offers both tax advantages and good investment returns making it a great investment choice for everyone. However, it is always recommended to diversify the investments.