What is NPS Scheme, how to apply and maintain? what to do with maturity proceed? Pros and cons. Here is a complete low-down on the most coveted pension scheme in India
The National Pension System (NPS) was launched by the Government of India in 2004 for government employees. However, in 2009, it was opened to all Indian citizens on a voluntary basis, including private citizens. Private citizens could enroll in the NPS through Points of Presence (PoPs), which were authorized by the Pension Fund Regulatory and Development Authority (PFRDA).
Initially, only Tier-I accounts were available to private citizens, which are non-withdrawable accounts meant for retirement savings. Later, in 2011, the Tier-II accounts were also made available to private citizens, which are withdrawable accounts that can be used for short-term financial goals.
Since then, NPS has become a popular investment option for private citizens, with its low-cost structure, flexibility, and tax benefits. Private citizens can choose from different investment options, such as equity, debt, and government securities, based on their risk appetite and investment goals.
The NPS allows subscribers to accumulate a pension corpus during their working life and withdraw it upon retirement. Here’s how to withdraw the maturity amount and invest in an annuity:
- At the age of 60: When the subscriber reaches the age of 60, he/she can withdraw up to 60% of the corpus tax-free. The remaining 40% must be invested in an annuity plan. The annuity plan provides a regular pension income to the subscriber for the rest of his/her life. Now NPS scheme can be extended till 75 years of age for contribution.
- Before the age of 60: If the subscriber wishes to withdraw the corpus before the age of 60, he/she can do so only under certain conditions, such as critical illness or death. In such cases, up to 20% of the corpus can be withdrawn tax-free, and the remaining 80% must be used to purchase an annuity plan.
To invest in an annuity plan, the subscriber can choose from various annuity providers registered with PFRDA, such as Life Insurance Corporation (LIC) of India, SBI Life Insurance, HDFC Life, ICICI Prudential Life Insurance, etc. The annuity plan offers different options, such as a fixed pension for a lifetime, pension for a certain period, pension for the lifetime of the subscriber and spouse, etc.
Pros of NPS maturity and annuity:
- Tax benefits: The contributions made towards NPS are eligible for tax benefits under section 80C of the Income Tax Act. Additionally, the corpus accumulated and annuity received are also tax-exempt to a certain extent.
- Flexibility: NPS offers flexibility in terms of investment options and annuity providers. The subscriber can choose from various investment options, such as equity, debt, and government securities, based on his/her risk appetite. Similarly, the subscriber can choose from various annuity providers and annuity options to suit his/her requirements.
- Regular pension income: An annuity plan offers a regular pension income to the subscriber for the rest of his/her life. This ensures financial stability during retirement and eliminates the risk of outliving the retirement savings.
Cons of NPS maturity and annuity:
- Limited liquidity: NPS has a lock-in period until the subscriber reaches the age of 60. Even after that, only 60% of the corpus can be withdrawn tax-free, and the remaining 40% must be used to purchase an annuity plan. This limits the liquidity of the retirement savings.
- Annuity rates: The annuity rates offered by the annuity providers may not be attractive, leading to a lower pension income than expected.
- Market risk: NPS invests in various asset classes, such as equity, debt, and government securities, which are subject to market risks. This can result in fluctuations in the corpus accumulated and the pension income received.
he National Pension System (NPS) offers several annuity plans from different annuity service providers (ASPs).
- Life Annuity: The Life Annuity option provides a regular pension income for the rest of the subscriber’s life. The pension stops on the subscriber’s death, and there is no provision for the return of the purchase price. This plan is suitable for individuals who want a guaranteed income stream during retirement and do not want to worry about market fluctuations.
- Joint Life Annuity: The Joint Life Annuity option provides a regular pension income to the subscriber and his/her spouse for the rest of their lives. The pension stops on the death of both the subscriber and the spouse, and there is no provision for the return of the purchase price. This plan is suitable for individuals who want to ensure financial security for their spouse even after their death.
- Life Annuity with Return of Purchase Price: The Life Annuity with Return of Purchase Price option provides a regular pension income for the subscriber’s life, and on his/her death, the purchase price is returned to the nominee. This plan is suitable for individuals who want to ensure that their nominee gets the corpus on their death.
- Life Annuity with Guaranteed Period: The Life Annuity with Guaranteed Period option provides a regular pension income for the subscriber’s life, and in case of his/her death during the guaranteed period, the pension is paid to the nominee for the remaining guaranteed period. This plan is suitable for individuals who want to ensure that their nominee gets the pension for a certain period in case of their untimely death.
- Increasing Life Annuity: The Increasing Life Annuity option provides a regular pension income for the subscriber’s life, with an annual increase in the pension amount at a predetermined rate. This plan is suitable for individuals who want to ensure that their pension keeps pace with inflation and maintains their purchasing power.
It is advisable to compare the features, benefits, and rates of different annuity plans offered by the ASPs and choose the one that best suits the individual’s requirements.
