Introduction: What is NPS?
The National Pension System (NPS) is a government-backed voluntary retirement savings scheme. It allows individuals to contribute regularly during their working years and receive a pension (annuity) after retirement.
Why NPS is Important?
- Retirement Security: Builds a long-term corpus with market-linked growth.
- Low Cost: One of the lowest expense structures among retirement products.
- Tax Benefits: Multiple deductions available (see below).
- Choice & Flexibility: Choose asset mix and pension fund manager.
NPS Structure & Types
- Tiers: Tier I (primary retirement account with restrictions), Tier II (optional, flexible withdrawal).
- Asset Classes: Equity (E), Corporate Debt (C), Government Bonds (G), Alternate Assets (A).
- Investment Choice: Active Choice (you choose allocation) or Auto Choice (age-based allocation).
- Eligibility: Indian citizens (18–70 years).
Tax Benefits (Indicative)
- Section 80CCD(1): Up to ₹1.5 lakh (within 80C limit).
- Section 80CCD(1B): Additional ₹50,000 exclusive deduction for NPS.
- Section 80CCD(2): Employer contribution deduction (subject to rules).
- Tax on Exit: Partial tax benefits on lump sum; annuity income taxable as per slab.
Withdrawals & Exit
- Partial Withdrawal: For specified purposes (education, illness, etc.) after certain years, as per rules.
- Exit at 60: Up to 60% lump sum (tax-advantaged) + at least 40% to purchase annuity.
- Premature Exit: Different rules apply; larger portion into annuity.
Conclusion
NPS is a disciplined and efficient way to accumulate a retirement corpus with attractive tax deductions. Combining NPS with SIPs in mutual funds can create a strong, diversified retirement plan.