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Understanding NPS Retirement and its Benefits
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Considering the uncertainties of life, retirement planning is extremely important to secure your financial future. Proper planning supports early retirement, increases life expectancy, covers medical expenses in old age, helps maintain lifestyle, allows achieving retirement goals, and gives financial independence. NPS retirement benefits let subscribers contribute a certain percentage of their earnings towards their retirement corpus. Post-retirement, they can build wealth and earn a monthly pension to lead a comfortable lifestyle.
In the following sections, we will discuss NPS in terms of its retirement benefits.
What Does NPS Retirement Mean?
NPS retirement or National Pension System is a voluntary, long-term, social security investment plan for retirement regulated by the Central Government and the Pension Fund Regulatory and Development Authority (PFRDA). Open to employees in the public, private, or unorganised sectors except the armed forces, the scheme persuades people to invest money in an instrument that can provide them with a pension after their retirement. Apart from a monthly pension, the NPS retirement plan also provides a lump sum at retirement and several benefits to the subscriber's family.
Retirement Benefits Overview
One of the most important NPS benefits after retirement includes the lump sum withdrawal at maturity. An NPS account matures when the subscriber turns 60. That means they can only withdraw a lump sum from their NPS account at retirement. According to the NPS rules, an individual can withdraw 60% of the total corpus at maturity (Tax-Free) and invest the remaining 40% in annuity. However, if the account holder needs funds before maturity, NPS also allows pre-mature withdrawal but with certain conditions and limits.
Pre-mature withdrawal is allowed only for specific purposes, such as educating children, covering a medical emergency, or building a house. An account holder can withdraw up to 25% of their contribution in a Tier I account, but only after three years of opening the account. Moreover, only three partial withdrawals are allowed before retirement,
Annuity Purchase
At maturity, when an individual invests 40% of their corpus in the annuity, fund managers invest it in Equity, Government Bonds, Corporate debt, and Alternative securities. It provides a regular income as a monthly pension at a fixed rate. Consequently, it becomes a steady income source post-retirement. There are various types of annuity options to choose from:
Retirement Age Considerations
Individuals above 18 can start investing in the scheme to avail of the NPS benefits on retirement. Since the subscribers will contribute a part of their monthly income for life, they will accumulate a significant corpus at retirement. That means the earlier they start investing, the more they can invest and the bigger wealth they can build.
Here are a few strategies for choosing the right retirement age:
Planning for Retirement with NPS
NPS is an excellent scheme offering multi-faceted benefits. Follow these retirement planning strategies to achieve goals with NPS:
NPS Retirement Accounts
There are two types of NPS retirement accounts:
Tier-I Account: This is the mandatory account by default for achieving NPS retirement benefits. It keeps the contributor's funds locked until retirement, except under specific conditions. Partial withdrawals are allowed if the account holder needs money to educate children, cover a medical illness, pay for wedding costs, or purchase a house. It provides tax benefits under Section 80CCD (1), Section 80CCD (1B), and Section 80CCD (2).
Tier II NPS Account: This is an optional NPS account with no minimum balance requirement and a minimum contribution of Rs 250 per instalment. However, it does not provide tax benefits; the returns earned are taxable. It allows partial withdrawal without any restrictions and has no lock-in period. High flexibility and liquidity are the primary NPS benefits after retirement, making it a valuable financial resource for emergencies.
Conclusion
Lump sum corpus, monthly pension, tax benefits, partial withdrawals, and financial security are the primary NPS retirement benefits. With monthly contributions towards the retirement fund, it encourages proactive retirement planning and ensures a secure financial future. Choose the right type of NPS account and open one at Kotak to avail of the maximum benefits. Visit https://www.kotak.com/en/personal-banking/investments/national-pension-system.html for further information or to open an NPS account.
Frequently Asked Questions
1. How much pension will I get from NPS after retirement?
Your pension from NPS after retirement depends on your monthly contribution, investment horizon, and interest rate.
2. What are the rules for NPS retirement?
To invest in an NPS retirement scheme, you must invest some monthly amount towards the scheme and build a corpus by retirement. When you retire, you can withdraw 60% of the accumulated corpus (Tax-Free) and invest 40% in an annuity that provides a monthly pension for life.
3. How much can I withdraw from NPS during retirement?
You can withdraw 60% of the accumulated corpus at retirement and invest the remaining 40% in annuity for a monthly/quarterly/yearly/half yearly pension.
4. Is NPS better than a pension?
While pension only pays the maturity amount at retirement, NPS also invests 40% in the annuity to earn higher returns and also gives tax benefits. So, NPS is better than a pension for many reasons.
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