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What is NPS (National Pension Scheme): Meaning & Scheme Details
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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.
NPS stands for National Pension System. NPS (National Pension System) is a low-cost, portable retirement savings scheme that is easily accessible and provides significant tax benefits. Regarding NPS meaning, it is a social security initiative that the central government launched as a pension programme for employees in the private, public, and unorganised sectors of the Indian economy.
By now you must have got an idea of what the NPS scheme is. The primary goal of the NPS scheme is to encourage people to save and invest during their employment. After retirement, they can withdraw up to 60% of the accumulated corpus as a lump sum and the remaining 40% will go in an annuity to receive a regular monthly pension for life.
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:
Types Of NPS Accounts
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 Permanent Retirement Account Number (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.
Investment Options Under NPS
Two major kinds of NPS 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:
Read More: NPS Eligibility
NPS Formula
An National Pension System (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
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.
Read More: NPS Registration
Features 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.
National Pension Scheme Tax Benefits
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
Click NPS tax benefits to read more.
How to Invest In National Pension Scheme?
Now that you know the eligibility criteria, let's explore how to invest in NPS. The Pension Fund Regulatory and Development Authority (PFRDA) oversees NPS operations and offers online and offline methods to open an account.
Steps to Open NPS Account Offline:
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.
Steps to Register for NPS Online:
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.
Click how to invest in NPS to read more
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 the Full Form of NPS?
The full form of NPS is the National Pension System.
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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