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National Pension Scheme (NPS): Meaning, Scheme Details, Benefits and Formula
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If you're wondering what the National Pension Scheme in India is, it could well be the key to transforming your retirement into a secure future. The NPS account’s full form is National Pension System Account: it is a government regulated program designed to provide retirement benefits to every Indian citizen. very Indian citizen, as it serves as vital financial support during their retirement years. However, before we discuss the in-depth details, understanding what is the NPS and a few other basics are essential.
Ready to learn more than just the full form NPS? Eager to get into the specifics? You are at the right place! Read ahead.
To grasp what the NPS means, we must first examine the rules and administration that are included in the NPS scheme details. The Pension Fund Regulatory and Development Authority, renowned as the PFRDA, defines NPS as a system seen as a voluntary contribution linked directly with the market and well-managed by the fund managers.
Essentially, NPS serves as a mechanism for individuals to pool their savings, channeling them into a pension fund overseen and funded by the PFRDA. This fund, in turn, invests in a diverse range of portfolios, spanning corporate debentures, shares, and government securities. This dynamic approach underpins the potential for long-term growth and financial security.
Within the framework of the National Pension System, individuals hold the option to either exit the plan before reaching retirement age or continue contributing until superannuation. This flexibility ensures that NPS accommodates various life trajectories and financial goals, making it a versatile instrument for securing one's retirement future.
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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Objectives of the National Pension System
Now that you know what is NPS, let’s head on to its objectives. Below are some of its key objectives discussed in detail:
NPS Scheme Details and Features
The NPS pension scheme details include two types of accounts, i.e., Tier 1 and Tier 2. The NPS scheme enables individuals to move to systematic investments into the two accounts. The account opening for NPS requires generating the PRAN for every subscriber.
1. Tier 1 Account
Tier 1 account of the National Pension System (NPS) functions as the primary retirement account with tax benefits. Subscribers contribute a minimum of ₹1,000 annually and enjoy deductions under Section 80CCD (1) of the Income Tax Act, up to ₹1.5 lakh, including contributions to the Employee Provident Fund (EPF) and other investments. Additionally, an exclusive benefit of up to 10% of the gross income under Section 80CCD (2) is available for employer contributions of up to ₹7.5 lakh. These tax advantages make Tier-1 NPS an attractive long-term savings option for subscribers.
2. Tier-2 Account
Tier-2, unlike Tier-1, does not offer tax benefits but provides greater flexibility in terms of contributions and withdrawals. It is an optional account that can be opened either along with the Tier-1 account or later. While Tier-2 doesn't provide tax deductions, it allows subscribers to invest and withdraw funds as needed, making it a versatile choice for those with varying financial goals.
Options of Investment
Two major kinds of investment options enhance the flexibility of the scheme. These are-
Active Choice: This option empowers individuals to take control of their investment strategy. With Active Choice, you get to personally select your desired asset mix, tailoring it to your risk tolerance and financial goals. It provides a hands-on approach to managing your NPS investments.
Auto Choice: Auto Choice offers a more automated approach. It adjusts your asset mix based on your age, with equity exposure gradually decreasing as you get closer to retirement. This minimizes risk as you approach your retirement years, with three profiles to choose from -
What is the NPS Scheme Eligibility
An individual's eligibility for the NPS scheme depends on different NPS models. These are as follows-
For Individuals:
For Corporations:
NPS Formula
An NPS formula used in the NPS Calculator aids in determining the accumulation of the total amount.
A= P(1+r/n)^nt
Where,
P stands for Principal sum
R/r stands for rate of interest per annum
N/n stands for the number of times the interest compounds
T/t stands for total tenure
For example, a 34-year-old man with a monthly contribution summed to Rs 3000 will be required to add a pension account for 26 more years. Taking the assumption that ROI is 10% annually, the details will be
Total Principal invested Rs 9.36 lakh
Sum expected upon maturing- Rs 44.35 lakh
NPS Account Registration via the Kotak Mahindra Bank’s Website
Registration Methods and Steps
Opening an NPS account through Kotak Mahindra Bank’s NPS portal is a swift, paperless process. You have several registration methods to choose from, each with common steps:
For cases without OTP/eSign, print the form, attach a photograph (without signature), and send it to Protean eGov with attestation. These convenient options make opening an NPS account with Kotak Mahindra Bank easy and hassle-free.
Benefits of NPS (National Pension System)
Benefits of the National Pension Scheme
Returns and Interest
A portion of your contributions is allocated to equities, offering returns that surpass traditional tax-saving investments like the PPF. Over the past decade, the NPS has consistently delivered annualised returns ranging from 9% to 12%. Moreover, you can switch fund managers if dissatisfied with your fund's performance.
Risk Management
NPS places a cap on equity exposure, maximum upto 75%. For government employees, this cap is set at 50%. With the Auto choice also known as lifecycle fund, the system will rebalance the portfolio every year on the Date of Birth of the Subscriber, reducing the equity exposure and allocating the same between stable assets – corporate bond and Government securities. This safeguard stabilises the risk-return balance, protecting your corpus from the equity market's volatility.
Regulation and Transparency
The PFRDA closely monitors NPS, ensuring adherence to transparent investment norms and conducting regular performance evaluations of fund managers through NPS Trust. This regulatory oversight enhances the scheme's reliability.
Flexibility
NPS allows subscribers to contribute anytime during the financial year, adjust contribution amounts, and select their preferred investment options. You can manage your account online from anywhere, even when changing cities or jobs.
Tax Benefits with NPS
Tax benefits associated with NPS schemes benefits under the Income Tax Act are an added incentive:
The National Pension System (NPS) offers significant tax-saving benefits to individuals, whether they are government employees, private employees, or self-employed. Section 80CCD(1) of the Income Tax Act allows for deductions:
Moreover, Section 80CCD(2) provides additional tax benefits on the employer's contribution to NPS for salaried individuals. The employer's contribution can be equal to or higher than the employee's contribution. This deduction is separate from Section 80CCD(1) benefits.
Section 80CCD(1B) also allows individuals to claim an extra deduction of Rs 50,000 over and above the Section 80C limit of Rs 1.5 lakh. This means that individuals can avail a total deduction of Rs 2 lakh by contributing to the National Pension Scheme under Section 80CCD(1B).
Here's a table of the tax-saving benefits under different sections:
These provisions make NPS an attractive choice for tax-efficient long-term savings and retirement planning.
Corporate/Employer Benefits
Employers can also take advantage of tax breaks by contributing to their employees' NPS accounts, with deductions of up to 10% of the employee's salary (Basic + DA) eligible as a 'Business Cost' from the Profit & Loss Account under section 36(1)(iv)(a).
Other Corporate Benefits
National Pension Scheme Eligibility Made Simple
Who Can Join NPS?
The national pension scheme eligibility is open to individuals, which is discussed in the following points:
Indian Citizenship: Whether you're a resident or non-resident Indian (NRI) including OCI, you can join NPS.
Age Range: Individuals between 18 and 70 can participate in NPS.
KYC Compliance: You should adhere to the Know Your Customer (KYC) requirements specified in the application form.
Contractual Competence: You must be legally competent to enter into a contract according to the Indian Contract Act.
However, it's important to note that Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS. Additionally, since NPS is an individual pension account, it cannot be opened on behalf of a third party.
Investing in the National Pension Scheme
Now that you know the eligibility criteria, let's explore how to invest in the National Pension Scheme. The Pension Fund Regulatory and Development Authority (PFRDA) oversees NPS operations and offers online and offline methods to open an account.
Offline Method
Your sealed welcome kit will include this PRAN and a password, allowing you to access and manage your NPS account. Note that this process has a one-time registration fee of Rs. 400.
Online Method
Opening an NPS account has never been more convenient, taking less than half an hour. Here's how to do it online at enps.nsdl.com: The most fastest and seamless mode is using Aadhaar. This can be Aadhaar online or Offline mode (this is also online but with Aadhaar eKYC file upload). Also with recently introduced mode, Digilocker is also made available.
Following these simple steps, you can kickstart your journey towards a secure and stable financial future with the National Pension Scheme.
KOTAK MyNPS
Opening a National Pension System (NPS) account with Kotak Mahindra Bank is a seamless process for individuals already holding a savings account with the bank. Through the user-friendly online NPS portal, one can initiate the account setup swiftly and effortlessly. This hassle-free approach ensures that, in practically no time, individuals can embark on their NPS journey, securing their financial future with ease.
The Path to Financial Security
The National Pension System (NPS) is a compelling investment option, provided it aligns with your financial objectives and risk tolerance. If the advantages we've discussed resonate with your investment goals, it's worth considering this scheme as a vital part of your financial planning journey.
However, ensure you have collected all the documents required for the NPS scheme beforehand.
Ultimately, the key to financial success is making informed decisions that suit your unique circumstances. Whether you opt for the stability of the NPS or the dynamism of mutual funds, remember that your financial future is in your hands. Make your choices wisely and secure the prosperous retirement you deserve.
Who Should Consider NPS?
The NPS is a viable choice for individuals keen on planning for retirement and those who favour low-risk long-term investment. It promises the security of a regular pension during retirement, which can be of significant financial assistance.
This systematic investment strategy can significantly enhance your quality of life post-retirement. Moreover, the NPS is an attractive option if you're a salaried individual aiming to maximise your deductions under Section 80C.
Frequently Asked Questions
1. What is an NPS account?
An NPS account refers to an individual's dedicated account within the National Pension System (NPS) where contributions are accumulated and invested to build a retirement fund.
2. What is NPS full form in Banking?
The full form of NPS account is the National Pension System as per banking terms. It is well-funded by the PFRDA as they are the pension fund manager. It is a scheme commenced by the Government of India to help Indian citizens with retirement planning.
3. What is a Pension Fund Manager?
Pension fund managers are responsible for overseeing the financial management of pension funds. They invest these funds to grow assets for the future. Kotak Mahindra Pension Fund Management is a PFRDA approved pension fund manager under NPS.
4. What is a Permanent Retirement Account Number (PRAN)?
A Permanent Retirement Account Number (PRAN) is a twelve-number digit that is a numerical code that is allocated to every person enrolled with NPS. It is a unique numerical code allotted to every person separately.
5. What is Auto Choice in the National Pension System (NPS)?
Auto Choice in the National Pension System is designed for investors who prefer a hands-off approach to asset allocation. With Auto Choice, your investments are automatically distributed across various asset classes, depending on your age. The allocation begins more aggressively, with higher equity exposure, and gradually reduces the equity component as you grow older. This approach is suitable for those who want a set-it-and-forget-it strategy.
6. How does Auto Choice work in NPS?
Auto Choice is another option offered in the National Pension System (NPS) designed for subscribers who prefer a more hands-off approach to asset allocation. With Auto Choice, your investments are automatically managed based on your age and the life cycle of your investment. The system starts with a higher equity exposure when you are young and gradually shifts towards a more conservative asset allocation as you approach retirement, reducing equity exposure. There are three predefined life cycle options available under Auto Choice:
Aggressive LC*75: With an equity allocation of 75%
Moderate LC*50: With an equity allocation of 50%
Conservative LC*25: With an equity allocation of 25%
Auto Choice is a convenient way to ensure that your investments align with your changing risk tolerance over time.
7. What is Active Choice in the National Payment System (NPS)?
This default choice suits subscribers willing to decide their assets' mix by themselves. Subscribers can choose their ratio of contribution among the classes.
8. How does Active Choice work in NPS?
Active Choice provides subscribers with the flexibility to personally decide how to allocate their assets within the National Pension System (NPS). They can select the specific mix of asset classes, and under this choice, the equity allocation can be up to 75% of their investments. Subscribers can also opt for different Pension Fund Managers (PFMs) for each asset class within Active Choice.
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