Retirement is the most valuable phase in your life. It is free from family, work and other financial commitments. However, retirement can be peaceful when you have the required financial resources timely.
Therefore, investing in various financial products is necessary to help accomplish all your money goals. The government and financial institutions offer different retirement pension plans in our country. The National Pension Scheme is one of the most prevalent among them. So, what is the most popular National Pension Scheme(NPS) Tier 1?
Before we understand the NPS Tier 1, let us briefly know what the NPS scheme means.
What is the National Pension Scheme?
National Pension Scheme(NPS) is a retirement pension scheme introduced by the Government of India wherein you will open an NPS account and invest a certain amount annually for a long term. The amount accumulates into a huge corpus at the time of your retirement. At maturity, you can withdraw a certain amount and utilise the remaining amount to purchase an annuity plan to receive a regular income as a pension after retirement.
There are two investment accounts in the NPS: Tier I and Tier II. Investors can choose to invest in one account or both based on their financial requirements and affordability. Investing in the Tier I account is compulsory. Therefore, Tier II is voluntary. And for investing in Tier II, you should have opened the Tier I account.
Let us discuss in detail the Tier I NPS account here.
NPS Tier I Eligibility
Understanding the eligibility criteria is primary to investing in the NPS Tier I scheme.
- You have to be a citizen of India or an NRI to invest in NPS Tier I.
- Your age has to be between 18 years and 65 years to invest in the NPS Tier I. However, if you are over 65 years old and want to open the NPS account, you will be allowed to do so, subject to certain terms and conditions.
How Does the NPS Tier I Investment Work?
The amount present in your NPS Account is invested in the financial securities market.
When you plan to invest in NPS Tier I, there are two different options.
- Active Choice - In the active choice strategy, you, as an investor, can decide on the type and proportion of investment.
- Auto Choice - In the auto choice strategy, the fund and the allocation are pre-determined based on the risk profile.
Here is a detail about the investment funds available for the NPS Tier I scheme.
- Asset Class A - Investing in alternative assets such as Alternative Investment Funds(AIF), Mortgage Backed Security(MBS), etc.,
- Asset Class C - Investing in financial instruments that yield fixed interests.
- Asset Class E - Investing in equity up to 50% of the portfolio.
- Asset Class G - Investing in government securities.
If you have opted for the active choice strategy, you can invest in the asset classes mentioned above based on your preferences. In addition, you can decide on the proportion of investment made in the individual asset classes.
If you have opted for the auto choice strategy, your investment amount will be split and invested in the different asset classes based on your risk appetite and age. The proportionate investment is prescribed by the Pension Fund Regulatory and Development Authority(PFRDA). Therefore, you will not be required to monitor the account.
NPS Tier I Withdrawal Rules
Withdrawal benefits in NPS Tier I are governed by certain rules. Here is a detail about it.
- You can make up to 3 partial withdrawals from the NPS Tier I account. And it is applicable after 3 years of opening the account. Withdrawal can be for fulfilling important financial commitments such as paying for your child's higher education, medical costs related to dependent parents, etc.
- The withdrawals should not exceed 25% of your contribution in total.
- The NPS Tier I account will mature when you are at the age of 60. You can withdraw up to 60% of the corpus at this stage and utilise the remaining to purchase the annuity.
Benefits of the NPS Tier I Scheme
Investing in the NPS Tier I scheme is attractive for its tax* benefits. Here is a detail about it.
- You can avail of a tax* deduction for the investment made in the NPS Tier I of up to ₹1,50,000 under Section 80C of the Income Tax Act, 1961.
- You can avail of another tax* deduction of up to ₹50,000 under Section 80CCD. Therefore, the total tax* deduction applicable is ₹2 lakhs.
- The 60% withdrawal made at maturity is tax*-exempt.
- The NPS Tier I returns retained in the account remain tax*-exempt.
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Investing in the NPS Tier I is considered one of the effective means to save funds for your retirement consistently over the long term. It provides dual benefits, creating wealth and saving on tax. You can open the NPS Tier I account and save funds regularly to accumulate a retirement corpus.
Then, when the account matures, when you turn 60 years old, you can withdraw a portion of the fund and invest the remaining in an annuity for a regular income. The investment made and returns will qualify for a tax deduction and tax exemption under the Income Tax laws. So, plan to invest smartly and ensure to accumulate the funds timely for securing your retirement while saving on tax.