National Pension Scheme (NPS)

The National Pension Scheme is a voluntary defined contribution pension system in India. Like PPF and EPF, the National Pension Scheme is an EEE instrument in India where the entire corpus escapes tax at maturity, and the whole pension withdrawal amount is tax-free.
With a wide range of investment options in the market, choosing which one works best for your requirements can often be challenging. Out of these, National Pension Scheme and Fixed Deposit are often considered popular and reliable investment options for different financial goals.

Features of National Pension Scheme

Here are the specific features and benefits of investing in the National Pension Scheme:

• Portability: NPS is a portable pension scheme, meaning that subscribers can continue their pension savings even if they change jobs.
• Choice of investment options: NPS offers investment options in equity, corporate bonds, and government securities, which allows subscribers to choose their preferred investment mix.
• Fund Management: NPS has a fund management system, where pension fund managers manage the investment of subscribers' contributions.
• Systematic Investment Plan: NPS allows for systematic investment through monthly contributions, which can help subscribers to build a pension corpus over time.
• Nomination facility: Subscribers can nominate a beneficiary, who will receive the corpus in the event of the subscriber's death.
• Low costs: NPS is known for its low costs, which make it an attractive option for long-term pension savings.

Benefits of the National Pension Scheme

• Tax benefits: Contributions to NPS are eligible for tax benefits under Section 80C of the Income Tax Act and additional deductions under Section 80CCD (1B).
• Pension benefits: Upon retirement, subscribers can withdraw up to 60% of the corpus as a lump sum and use the remaining 40% to buy an annuity, which provides a regular pension income.
• Market linked returns: NPS invests in a mix of equities, bonds, and government securities, which provides market-linked returns to subscribers.
• Annuity options: Subscribers have the option to choose from a range of annuity plans and providers, which provides flexibility in terms of pension income.
• Transparency: NPS provides subscribers with regular account statements, which can help them track their pension savings and investment performance.

Note: The actual benefits may vary based on the subscriber's specific circumstances and the rules in effect at the time of withdrawal.

Types of NPS Accounts

There are two types of NPS accounts, Tier I and Tier II. The former is the default account, while the latter is a voluntary addition. The table beneath clarifies the two record types exhaustively.

The Tier-I account is compulsory for every individual who selects the NPS scheme. The Central Government representatives need to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.

How to open an NPS account

You can now open an NPS account from the comfort of your home. Opening an account online (enps.nsdl.com) is easier than ever, all you need to do is, link your account to your PAN, Aadhaar and mobile number.

 To open a National Pension Scheme (NPS) account, follow these steps:

1. Choose the type of account you want to open: Tier 1 or Tier 2. Tier 1 is a mandatory savings account, while Tier 2 is a voluntary savings account.

2. Obtain a Permanent Retirement Account Number (PRAN) from a Point of Presence (POP) - Service Provider or a Common Service Centre (CSC).

3. Fill out the NPS registration form, providing personal details and information about your bank account.

4. Submit the completed form, along with required documents such as proof of identity and address, to the POP or CSC.

5. Make an initial contribution to your NPS account through online transfer, cheque, or cash.

6. Start contributing regularly to your NPS account as per your convenience.

It is important to keep in mind that NPS is a long-term investment plan and requires a minimum contribution to be made every year to keep the account active.

How is NPS calculated?

Before investing in NPS, it might be worth exploring how the returns are calculated and what pension amounts you can expect at the end of your tenure. Here is the formula for calculating NPS:
A = P (1 + r/n) ^ nt
where,
P = principal
r = rate of interest
n = number of times interest has compounded
t = total tenure

NPS interest rate

It is important to note that there is no singular interest rate for NPS. This is because NPS is essentially market-linked, which means the interest rate for its returns depends on the performance of the assets that you invest in.

To that end, here are the four types of asset classes in which you can invest with NPS:

The scheme has been in place for more than ten years and has thus far produced annualized returns of 9% to 12%. If you are unhappy with the performance of the fund, NPS also gives you the option of switching fund managers.

How to use NPS withdrawal money?

NPS investments are one of the most recommended modes of investment for people looking to fulfil long-term financial goals. This is because you can only exit an NPS and withdraw the resulting amount after a period of 10 years. NPS withdrawal money can therefore be utilised for looking after your retirement, funding your children’s education or wedding or making an essential purchase such as buying a home.

NPS v/s Bajaj Finance FD

To gain a better perspective on how an NPS investment fares against an investment such as the Bajaj Finance Fixed Deposit, here is a brief review of their comparison:

Thus, from the above table, it is clear that Bajaj Finance FD has several advantages over NPS, in terms of flexibility and assurance of guaranteed returns. NPS is an ideal investment for those looking to accumulate a corpus for retirement as well as to fulfil various long-term goals.

Whereas Bajaj Finance FD is a great investment for the short-term as well.

Those looking to choose between the National Pension Scheme (NPS) and Fixed Deposit need to know about the features and benefits of each of these investment options. For the most part, NPS is typically considered an essential investment option for any working professional who wishes to save up for a comfortable post-retirement life.