As people age, their sources of income decrease. Therefore, for some, managing their daily lives becomes difficult. Here, the National Pension Scheme (Tier-1) becomes a game-changer. Introduced in 2004, NPS has provided regular income for thousands of elderly citizens nationwide.
Let us take a closer look at NPS Tier-1 account, its features, benefits, workings, and other aspects.
Features of NPS Tier-I account
The NPS Tier-1 account is a long-term investment scheme that is backed by the Indian government. If you wish to subscribe to the NPS scheme, it serves as the primary account, and you must open it in your name. Below are some of its salient features:
- After attaining the age of 60, you can choose to extend the maturity age by another 10 years and remain invested.
- A portion of the Tier-I account can be withdrawn to meet specific financial needs, such as marriage costs or medical emergencies.
- NPS Tier-I accounts can be prematurely closed under certain conditions.
- Tier-1 account holders are eligible for tax deductions.
NPS offers the potential for higher returns due to its investment in market-linked assets. In contrast, fixed deposits offer a guaranteed interest rate that is locked in for the duration of your investment. This provides stability and predictability, especially important for risk-averse investors.
NPS Tier-I withdrawal and premature closure
You can withdraw some portion of the account if you need funds for occasions like marriage, studying abroad, or medical emergencies. However, you must follow a few steps related to NPS Tier-1 online withdrawal.
- The withdrawal is possible only after 3 years from the date of investment.
- A maximum of 25% is eligible for withdrawal at once.
- You can withdraw up to three times throughout the investment period.
- There should be a valid reason for withdrawing the amount before maturity.
If you wish to apply for premature closure (exiting the scheme), you can withdraw only 20% of the total amount, and the remaining 80% will be used to pay gratuity.
NPS Tier-I tax benefits
NPS Tier-1 offers plenty of benefits to investors. A few of these are highlighted below:
- You can invest up to Rs. 1.5 lakh in NPS and deduct it from your taxable income, which reduces your tax burden. This limit is included in the overall Section 80C limit for other tax-saving investments.
- If your company offers NPS, any contribution to your account (up to 10% of your basic salary) can also be deducted from your taxable income.
- In exceptional cases, you can take out some of your NPS Tier-1 savings before retirement without incurring additional taxes.
- When you retire, you can take up to 60% of your total NPS savings as a lump sum, completely tax-free.
- The remaining 40% of your NPS savings will be used to provide you with a monthly pension (gratuity) after retirement.
How do Tier-I NPS investments work
The NPS Tier-1 account offers two investment strategies: the Active Choice Strategy and the Auto Choice Strategy.
In the Active Choice strategy, you select several investment funds, whereas the Auto Choice strategy allocates your investment based on your risk profile.
Under the NPS scheme, there are four investment funding categories:
- Class E, which invests at least 50% of the portfolio in equity securities
- Class C, which invests in fixed-income instruments other than Government securities
- Class G, which invests solely in government securities
- Class A, comprising of alternative assets
Maturity of the scheme
The National Pension Scheme (Tier-1) matures when the account holder turns 60. However, this period can be extended by another ten years.
After maturity, the account holder can withdraw 60% of the accumulated amount, while the remaining 40% can be used to purchase a fixed-rate annuity. Various payout options are available for annuities, including naming a spouse as the successor to receive the amount after the account holder's demise.
Another attractive option for building a retirement corpus is investing in a fixed deposit. Financial agencies like Bajaj Finance offer one of the highest interest rates of up to 8.85% p.a., resulting in greater savings while providing security to your capital.
Eligibility to open an NPS Tier-I account
To open the NPS Tier-1 account, you must meet specific eligibility criteria. These criteria include:
- You should be in the 18–60 age bracket
- You should be an Indian citizen or an NRI
- Rs. 500 is the minimum amount to open the NPS Tier-1 account
Documents required
The below documents must be submitted to open an NPS Tier-1 account:
- Registration form
- Applicant’s ID proof (Aadhaar Card, Voter ID, passport or driving license)
- Applicant’s address proof [ration card, recent electricity bills, bank statement or driving license (if it has a current address)]
Conclusion
The National Pension Scheme (Tier-1) account serves as an attractive option for individuals to secure their retirement. This account also offers several benefits, including flexibility and government backing. Thus, it is a reliable option for long-term savings. Furthermore, thanks to regulated investments, your retirement funds not only remain safe but also have the potential to grow over time. For individuals planning their retirement, the NPS Tier-1 account helps them achieve financial stability in their later years.
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