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Everything You Need To Know About Pension Scheme In India

Personal Finance

Getting old is a sure-to-come phase in every individual’s life, and there is no stopping it. However, it is up to you to plan your retirement so that you can enjoy your retired life and live stress-free by being financially independent. 

Rising nuclear families and children migrating to other countries for better career opportunities often leave their parents alone in the later stages of their lives. A pension plan is exactly what is needed in this scenario. Pension schemes such as the National Pension Scheme (NPS) help them to be independent when it comes to their finances so that they do not have to depend on their children for their every need.

The best pension scheme is designed to meet your post-retirement needs without having to rely on others for financial support of any kind. Right from your small day-to-day bills to the big medical bills, you can pretty much take care of it all provided you have started a pension scheme and saved towards the same from a very early age itself. 

Understanding the National Pension Scheme in India

The NPS, or National Pension Scheme, is an investment instrument that is available to all employees from the public, private, and unorganised sectors, apart from those in the Armed Forces. Under the purview of this pension scheme, those who subscribe to it can invest a nominal sum, which can be a minimum of Rs 6,000 annually. This amount can be invested as a one-time premium or be disbursed into staggered monthly instalments, which can go as low as Rs 500. 

Under NPS benefits, the contributions made by investors for market-linked instruments such as debt equities and their returns are dependent on the performance of the investments in the long run. Currently, the rate of interest offered under this pension scheme is between 8 and 10%.

An Indian citizen who is above the age of 18 can open a National Pension Scheme account. Managed by the Pension Fund Regulatory and Development Authority, the National Pension Scheme is tailor-made to offer pension and investment solutions at an older age.

In a default setting, the funds are used to invest in different assets such as bonds, government securities, and equity on behalf of the investor, but they can choose to make the investment choices themselves as well. They are tax-free under Section 80 CCD (1b).

Knowing the Benefits of the National Pension Scheme

Some significant benefits of the National Pension Scheme are:

  • Return on investment

A portion of the invested amount in the pension scheme is allocated towards investing in market-linked equities, which are known for offering high returns when compared to a general investment plan.

This pension scheme’s interest rates are also significantly higher than those of other market investment instruments. Currently, this pension scheme offers 9%–12% interest rates. This rate of return on investments highlights the national pension scheme’s benefits even further.

  • Tax Benefits 

For investments made under the National Pension Scheme, the tax benefits are one of the more lucrative features of this investment plan. NPS tax benefits [1] allow an investor to avail of up to Rs 1,50,000 in tax exemptions under Section 80C of the Income Tax Act of 1961.

Additionally, the tax benefits from this pension scheme also allow the employer’s and employee’s contributions to be eligible for tax exemption. For employer contributions, the maximum tax exemption amount is limited to the lowest of the three:

  • NPS Contribution Amount by Employer
  • 10% of the Basic Wages and Dearness Allowance
  • Gross Taxable Income

This provision under NPS tax benefits does not apply to self-employed professionals. One can also claim an additional sum of Rs 50,000 as a self-contribution sum under Section 80CCD (1B) as a tax benefit. 

  • Exit Clauses 

The National Pension Scheme offers benefits later in life when you need a financial resource pool the most. NPS schemes mature at the age of 60; therefore, one must continue to invest until one reaches maturity age. 

Partial withdrawals are also allowed after a minimum of three years have transpired in the NPS scheme window, and only 25% of the investments made can be withdrawn. If an investor requires liquid funds to meet a financial obligation, they can withdraw three times during the five-year tenure of the NPS scheme.

  • Equity Setting 

The investor in the National Pension Scheme has the option to choose. As per the equity allocation rules; one can only invest 50% of their investment in equities. 

  • Risk Margins 

The risk margins for this pension scheme, despite being market-linked, are relatively low. Equity exposures for investors turning 50 will be reduced by 2.5% every year to curb any investment losses. This ensures fund security with the added benefit of high returns.

Understanding The National Pension Scheme Eligibility[2] 

To avail of the benefits of this pension scheme, along with the tax benefits that aid investment and fund growth, one must fulfil the following criteria:

  • Should be an Indian citizen and taxpayer. 
  • Should be between the ages of 18 and 65. An NPS scheme matures at age 60; hence, the higher limit is closer to the age of retirement. 
  • Should comply with KYC guidelines.
  • Should not have an existing NPS account. 

Start Planning Your Retirement At The Earliest

Like in the case of most financial planning, you need to start thinking about your retirement corpus and picking out a pension plan to begin investing while you are still working. 

Understanding the importance of retirement planning and saving towards your pension scheme is very vital, right from the time you start earning. If you want to maintain your standard of living post-retirement and be financially independent while you are at it, then saving a large chunk of your current salary is the key.

To read more such articles about smart financial management, visit the Piramal Finance website. You will also find a host of other financial tools here, such as personal and home loans. So, what’s the wait? Get started on securing your financial future now!