Retirement planning can be quite a daunting task, especially if you are unaware about the financial products available in India. There are multiple options available which help in providing decent returns on your investment. One such option that could be worth considering is the National Pension Scheme (NPS). NPS is a government-sponsored retirement savings scheme and in this article, we will explore its benefits and the returns on your investments.
What is National Pension Scheme?
The National Pension Scheme (NPS) is a government initiative for social security. It is open to employees in various sectors except the armed forces. The scheme encourages regular investments in a pension account while you're working. NPS account holders receive the remaining amount as a monthly pension post-retirement.
Initially, it only covered Central Government employees, but those who joined after January 1, 2004, are now mandatory participants. The Pension Fund Regulatory and Development Authority (PFRDA) has expanded its availability to all Indian citizens on a voluntary basis.
NPS is primarily designed for long-term retirement income. To build a well-rounded financial plan, it is wise to explore other options as well. Fixed Deposits (FDs) offer guaranteed returns and flexible tenure, making them valuable investment option.
Benefits Offered by the National Pension Scheme
1. Tax exemption
One of the primary benefits of investing in NPS is tax exemption. Investors can claim a tax deduction on their contributions made during the year, up to a maximum of Rs. 1.5 lakhs under Section 80CCE of the Income Tax Act, 1961. Investors can also claim an additional tax deduction of INR 50,000 under Section 80 CCD (1B) of the Income Tax Act.
2. Returns
NPS investments provide market-linked returns, and individuals can avail of a regular pension post-retirement. The returns on NPS investments depend on the performance of fund managers and the underlying investment portfolio.
3. Simple exit rules
NPS offers easy and flexible exit options to its subscribers. After attaining the age of 60, investors can withdraw a maximum of 60% of their corpus amount as a lump sum. The remaining amount is used to purchase an annuity, which provides a regular income post-retirement.
Types of NPS Account
1. Tier I Account
The National Pension Scheme (NPS) account is a mandatory account for all employees.
NPS offers tax exemption up to Rs. 2 lakh p.a. (Under 80C and 80CCD).
The minimum NPS contribution for opening an account is Rs. 500
There is no limit on the maximum NPS contribution.
2. Tier II Account
- The National Pension Scheme (NPS) Tier II account is an optional for employees.
- Withdrawals from NPS Tier-II account are permitted.
- Tax exemption is 1.5 lakh for government employees and none for other employees.
- The minimum NPS contribution for opening an account is Rs.1,000
- There is no limit on the maximum NPS contribution.
NPS Returns for Tier I & Tier II Accounts
Here are the NPS interest rates of Tier I and Tier II accounts as of December 31, 2022.
1. NPS Returns for Tier I Accounts
| Asset Classes | Equity (Class E) | Corporate Bonds (Class C) | Government Bonds (Class G) | Alternate Assets (Class A) |
| 1-year returns (%) | 15.33-18.81% | 12.46-14.47% | 12.95-14.26% | 3.98-16.73% |
| 5-year returns (%) | 13.11-15.72% | 9.27-10.15% | 10.29-10.88% | NA |
| 10-year returns (%) | 10.45-10.86% | 10.05-10.64% | 9.57-10.05% | NA |
2. NPS Returns for Tier II Accounts
| Asset Classes | Equity | Corporate Bonds | Government Bonds |
| 1-year returns (%) | 15.19-17.92% | 12.71-16.36% | 12.61-13.42% |
| 5-year returns (%) | 13.05-15.83% | 9.55-10.17% | 10.40-12% |
| 10-year returns (%) | 10.35-10.58% | 9.86-10.60% | 9.59-10.07% |
How to Calculate NPS Returns
To calculate NPS returns, you can use NPS trust online calculator. The calculator will ask you to enter the monthly amount you want to invest, your current age, and the expected rate of return.
Who should invest in NPS?
NPS is suitable for individuals who are looking for a long-term investment option with retirement planning in mind. Additionally, it is suitable for individuals who are comfortable with market-linked returns and who have a moderate to high-risk appetite.
Step by Step Process to Open an NPS Account
1. Offline Process
To open an NPS Account offline, visit the nearest Point of Presence (POPs) authorized by PFRDA. These are specific banks and financial institutions providing NPS services. At POPs, you can subscribe to the NPS Scheme, make changes, and access related services. Just fill out the form with basic details and submit essential KYC documents like Aadhar card and PAN card.
2. Online Process
- Click on 'Registration' and choose 'Register with Aadhaar' option.
- Type your Aadhaar Number and click on the "Generate OTP" option.
- You will receive the OTP on your registered mobile number.
- Enter the OTP, along with your personal, nomination, and bank details.
- After the successful submission, you will receive a Permanent Retirement Allotment Number (PRAN).
- Click on the 'e-signature' option, and you will receive another OTP.
- Enter OTP to verify your signature and make the payment, and you're done!
Conclusion
The National Pension Scheme (NPS) provides a simple solution for retirement planning, whether through an offline process at authorized Points of Presence or online registration via Aadhaar, opening an NPS account is easy. With an emphasis on long-term financial planning and market-linked returns, NPS is a practical choice for a secure retirement future.
For a more balanced approach, consider complementing your NPS contributions with the stability and guaranteed returns of a fixed deposit. This helps diversify your retirement portfolio and offers a reliable income source.
