What is the National Pension Scheme

National Pension Scheme (NPS), a government-sponsored pension scheme, was launched in January 2004 for government employees. It was opened to all sections in 2009. A subscriber can contribute regularly in a pension account during her working life, withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy an annuity to secure a regular income after retirement.

It is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is run by the Pension Fund Regulatory And Development Authority (PFRDA) (http://www.pfrda.org.in/)

Where does National Pension System (NPS) invest your money?Under the NPS, individual savings are pooled into a pension fund which is invested by PFRDA-regulated professional fund managers as per the approved investment guidelines into diversified portfolios comprising government bonds, bills, corporate debentures and shares, stated PFRDA on its website, pfrda.org.in. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.

Advantages of National Pension System (NPS)NPS offers a range of investment options and choice of Pension Fund Manager (PFMs) for planning the growth of your investments in a reasonable manner and see your money grow.

Individuals can switch over from one investment option to another or from one fund manager to another subject, to certain regulatory restrictions. The interest rates on NPS are totally market-related.

How does National Pension System (NPS) work?

Opening an account with NPS provides a Permanent Retirement Account Number (PRAN), which is a unique number and it remains with the subscriber throughout his lifetime. The scheme is structured into two tiers:

Tier-I account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.

Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.

Is National Pension System (NPS) the only pension plan available in the country?
No. Some mutual funds and insurance companies also offer pension or retirement plans, but these are not under the jurisdiction of PFRDA. Some other retirement plan options are the employee provident fund, gratuity etc, which are offered by employers to their workers and employees.

Comparison Vs EPF
The National Pension System (NPS) and the Employees Provident Fund (EPF) are feasible options for saving money. Both NPS and EPF enable one to save regularly, which can grow into a considerable amount by the time the user retires. Although both the saving options give tax benefits and are government-sponsored schemes, there are basic differences relating to the quantum of tax exemptions that can be utilized, degree of flexibility of determining the equity exposure and rate of return, among other things.

1- Tax Benefits: Under section 80C, the employees’ contribution into the EPF is allowed to be deducted up to Rs 1,50,000. This is the maximum amount that can be deducted from a subscriber’s basic salary. As for NPS, subscribers can get a maximum of Rs 2 lakh in total, according to the Income-tax (I-T) Act. EPF offers its subscribers to save tax at all the three levels of contribution, interest accrual and at the time of withdrawal after retirement. However, NPS offers tax saving at the first two stages of contribution and interest accrual, but withdrawals are taxable. One restriction is the investor cannot take out the money except in cases of an emergency situation wherein you have the power to withdraw only 20% of your contribution after 3 years and the second option is you can’t withdraw the money before 10 years. The tax treatment is the main reason why many investors don’t prefer to join NPS. Only 40% of the amount is tax free, as compared to 100% in other retirement products like EPF and PPF.

2- Equity Exposure: EPF subscribers are allowed to invest a maximum of 15 per cent of their salary into equity. NPS subscribers can have up to 75 per cent equity exposure.

3. Flexibility: NPS is more flexible than EPF. In case of EPF, the subscriber cannot choose his/her fund manager, whereas NPS offers this flexibility. As of now, there are seven fund managers offering varying rates of returns. These seven fund managers are HDFC Pension Fund, ICICI Prudential Pension, Kotak Pension Fund, LIC Pension Fund, Reliance Capital Pension, SBI Pension Fund and UTI Retirement Solutions.

In NPS, the user can switch from one investment option to another or from one fund manager to another, to certain regulatory restrictions. The interest rates on NPS are totally market-related.

4. Accounts: EPF subscribers are allowed to operate only one account that is linked to the UAN. As for NPS, subscribers can open two accounts, where the first one is compulsory and the second one is a voluntary account. One should note that in the second account of NPS withdrawal is permitted.

5. Mandatory/ Optional: EPF is compulsory for every company in which 20 or more people are employed. The NPS account is mandatory only for government employees. However, private sector employees can also open an NPS account and avail its benefits.

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