It is not possible to work and earn when you reach old age. But old age requires sufficient funds to meet several expenses including health, daily expenses, etc. So, planning for a financially secure future after you retire is essential. A retirement corpus helps you spend your old age peacefully and meet several financial needs when you stop earning.

There are several plans available today to create an adequate financial corpus for retirement. The National Pension Scheme is designed for the same. Here's a detailed guide to the scheme.

What is the National Pension Scheme (NPS)?

The NPS scheme is an initiative of the Government of India introduced in 2004, where a salaried or self-employed individual invests during the working period of life. The investments made under the scheme grow into a retirement corpus that helps meet financial needs post-retirement.

Who is Eligible for the NPS? 

Indian citizens and NRIs aged between 18-60 years complying with the KYC norms can open an NPS account.

How Does it Work?

You can open an NPS account and deposit a part of your income regularly. You can withdraw a part of the corpus after maturity and avail of regular annuity payments out of the remaining corpus.

How to Open an NPS Account?

You can visit the nearest Point of Presence (POP); a registered entity under the scheme. With most Indian banks now NPS POPs, you have to fill out the registration form along with the KYC procedure at the POP. You can pay the initial contribution to the account through cheque or demand draft and get the Permanent Retirement Account Number (PRAN).

You can also open an NPS account by filling out the registration form on the official website of the scheme (enps.nsdl.com). You can also make an NPS online payment saving your time and effort.

NPS Accounts

There are two kinds of NPS accounts under the pension scheme:

Tier-I account

• Opening a Tier-I account is mandatory under the NPS.

• The least amount to be paid at the time of registration is ₹500 and the minimum amount per contribution of investment you can make at a time is ₹500.

• You cannot withdraw the corpus from a Tier 1 account until you reach the age of 60 years. But you can withdraw 25% of the accumulated amount after 5 years under certain conditions. These include unemployment for child’s education, marriage expenses, health emergencies, and among others.
  
  

Tier-II account

• Opening a Tier II account is voluntary under the scheme, and you can open it only if you have a Tier I account.

• The minimum investment at the time of registration is ₹1000, while the minimum investment you can make at a time is ₹250.

• The withdrawals from this account are flexible without any restriction.
  
  
  

How Can You Invest Under the National Pension Scheme?

The investments under the NPS are market-linked. So, while investing in the scheme, you are given two choices which are as follows:

Active

When you choose the active investment mode, you can divide your money into different assets as per your choice. The assets are:

• Equity: The investments made in equity are high risk and carry the potential of higher returns. So, if you wish for high returns, you can invest in equity.
  

• Government securities: Government securities are low-risk instruments that offer low to medium returns on your investment and are issued by central and state governments.
  

• Corporate bonds: Corporate bonds or debt securities carry moderate risks with medium returns on your investment. The investments include bonds issued by PSUs, PFIs, etc.
  

• Alternative investments: In alternative investments, you invest in real estate investment trusts, infrastructure investment trusts or alternative investments funds. These investment avenues carry low to high risks and medium returns on investment.
  
  

However, based on your age, there are certain limits on allocation to equity assets and alternative investment funds under the active choice.

Auto

Under the auto choice, you leave the task of choosing the amount for each asset to the fund manager. The fund manager invests your money according to your age and risk-bearing capacity. The corpus of funds is divided between different assets in the following ways:

• Aggressive Life Cycle Fund: Under the aggressive fund, the equity investment is capped at 75%. The allocation is done when the investor is aged up to 35 years.
  

• Moderate Life Cycle Fund: In a moderate life cycle fund, the equity investment is limited to 50% up to the age of 35 years of the investor.
  

• Conservative Life Cycle Fund: The equity investment under a conservative fund is further reduced to 25% as the age of the investor increases.
  
  

Thus, the corpus of funds is divided between different assets according to the age of the investor. As the age of the investor increases, the corpus of funds invested in equity is reduced and investments in fixed income instruments and government securities are increased.

Tax* Benefits Under the Scheme

• Under Section 80CCD (1), you can claim a tax* benefit on the investments in the Tier- I account within the ceiling of ₹1.5 Lakh under Section 80CCE of the Income Tax* Act.
  

• Under Section 80 CCD 1 (B), you can claim additional tax* deductions for investments up to ₹50,000 in Tier-I account over and above the NPS tax benefit under Section 80CCD (1).
  

• At the time of maturity, you can withdraw 40% of the corpus as a lump sum which is exempted from tax*. Do note that the income earned on annuities will not be tax exempted.
  
  

Benefits of the NPS

• Flexibility: You can invest any time in a financial year and also change the investment amount.
  

• Diversification: The scheme allows you to invest in different assets in several ratios according to your risk appetite. Also, the diversified pool of assets involves low risk.

• Professionally managed: The amount contributed to the scheme is invested by professional fund managers assigned by the Pension Fund Regulatory and Development Authority.

• Portable: The investment scheme is highly portable. You can continue with the scheme even if you change your employment.

How Can You Choose Pension Fund Managers?

While registering for the scheme, you have to choose a pension fund manager for your account. The fund managers are registered under the PFRDA and perform the task of investing your contributions according to PFRDA guidelines.

To choose a PFM under the scheme, you should analyse its performance. You can visit the NPS Trust website to view the performance of different fund managers and choose accordingly. The scheme also allows you to change your fund manager once in a financial year.

Conclusion

So, the best way to live a happy and stress-free post-retirement period is to invest in a retirement plan. With a retirement policy, you can benefit from the accumulated corpus and the annuity to make the most of the golden period of your life.

Tata AIA Life offers several types of retirement plans with flexible features to suit your needs. The plans come with the benefit of tax* deductions and exemptions on the premiums and withdrawals. So, start investing in a Tata AIA retirement policy now!

L&C/Advt/2022/Jul/1647