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Investing in NPS schemes gives you an additional tax advantage. Read on to know about the best way of investing in the scheme.
One of the many mediums to invest right is NPS. National Pension Scheme is an initiative taken by the Central Government for social security. This retirement program is available to employees from the private, public and the unorganized sectors, except for the ones from the armed force. The system promotes individuals to invest regularly during their employment in a pension account. A certain percentage of the collection in pension account can be taken out by the subscribers after retirement. The balance amount will be obtained as a monthly pension after retirement.
Previously, only the employees of Central Government were covered by the NPS scheme. However, Pension Fund Regulatory and Development Authority (PFRDA) has made it voluntarily available for all Indian Citizens. This scheme has enormous value for those employees who work in the private sector and need regular pension after retirement. NPS has a tax benefit under Section 80CCD(1).
NPS is a nice plan for those who wish to retire early and have less risk. Regular pension after retirement will certainly be a boon for those employees who have retired from the job of the private sector. Such systematic investment creates a huge change in your after-retirement lives. In fact, the employees who wish to avail the most use of Section 80CCD(1) deduction can take this scheme into consideration. A part of the NPS goes to equity. However, it provides far more returns than other tax-saving traditional investments such as PPF. This system is in force for a period of more than ten years, with annualized yields of 8% to 10% so far.
In NPS, if you are not pleased with the fund’s results, you may also alter your fund manager. After retirement, an individual cannot withdraw the whole collection of NPS scheme. In order to obtain a regular pension from PFRDA, you have to keep aside at least the 40% of the collection away and rest 60% is tax-free. The NPS is investing in various scheme and NPS’s Scheme E invests in equity. A maximum of 50% of your investment can be allocated to equity shares.
It is vital to know that investment can be made in two options i.e. auto choice and active choice. The auto choice determines your investment’s risk profile according to your age. For instance, the investments become stable and less risky if your age is more. The active choice makes it possible to decide the scheme and divide your investments. It is essential that you continue to invest in a pension scheme until the age of 60.
You can, however, withdraw up to 25% of NPS for specific purposes if you have been investing for at least 3 years. Specific purposes include higher education or the wedding of children, medical treatment of self/family, constructing/buying a house, etc. Withdrawal can be made up to 3 times in the entire tenure. Each withdrawal made must have a gap of at least 5 years. These restrictions are only applicable on account of Tier-I and not on Tier-II. There is two primary accounts of NPS: Tier-I and Tier-II. Tier-I is a default account whereas Tier-II is a voluntary account.
|Exemption from tax||Under 80C and 80CCD(1), up to Rs. 2 lakh||Under 80C and 80CCD(1), up to Rs. 2 lakh|
|Minimum contribution||Rs. 500- Rs. 1000 per annum||Rs. 250|
|Maximum Contribution||No limit||No limit|
For those who choose the NPS scheme, the Tier-I account is mandatory. Employees of Central Government must contribute basic salary’s 10% and for the rest, NPS is a voluntary investment option. Tax deduction of up to Rs. 2 lakhs can be claimed for NPS which includes the contribution of employer and as well as yours’s contribution.
PFRDA controls NPS operations and offers both online and offline method of opening this account. You will first have to find a PoP (Point of Presence) to start an NPS account offline or manually. Collect from nearest PoP a subscriber form and submit Know Your Customer (KYC) documents along with the form. Ignore if the bank already meets your KYC requirements. Once the initial investment has been made, PoP will give a Permanent Retirement Account Number (PRAN).
Number and password given in a sealed welcome kit will help in operating and managing the account. One-time registration fee is Rs. 125 for the above process. In less than half an hour, the NPS account can be opened online. Visit www.enps.nsdl.com to open an account online. It’s simple to open an account online if an individual links its account with PAN, Aadhaar and mobile number. One Time Password (OTP) will be sent to your mobile number which you need to input to complete the registration. After this, your PRAN will be generated which will help you in NPS login.
There are other tax-saving investment options under Section 80C apart from the NPS. Tax-saving instruments are Equity Linked Savings Scheme (ELSS), Fixed Deposits (FD) and Public Provident Fund (PPF). NPS may obtain better returns than PPF and FD but at maturity, it is not tax-efficient.
In the following 3 conditions, the subscriber can exit from NPS, as per PFRDA Regulations 2015:
Recommended Read: PPF Account: How to make the most of this tax-free Investment Option?