NPS Made Easy: A Step-by-Step Guide to Building Your Retirement Corpus With Confidence


Welcome to this article where we will delve into the overall concept of the
National Pension Scheme (NPS). Whether you're an employee looking for a retirement savings plan or an individual seeking a long-term investment option, NPS offers a flexible and convenient solution to meet your financial goals. In this article, we'll explore the basics of the National Pension Scheme and its features to help you make an informed decision about whether it's right for you. So, let's get started!

The National Pension Scheme (NPS) is a government-sponsored retirement savings scheme in India that was launched in 2004. The scheme aims to provide retirement income to all citizens of India, including those in the unorganized sector. NPS is a defined contribution scheme, which means that the retirement benefits depend on the contributions made by the subscriber and the returns earned on those contributions over time. It offers subscribers the flexibility to choose their investment options and fund managers, as well as the freedom to switch between them. With a range of tax benefits and low costs, NPS has emerged as a popular retirement savings option for both private and public sector employees in India. It is a voluntary contribution-based pension system that aims to provide financial security to individuals in their post-retirement years.


What is National Pension Scheme (NPS)?

The National Pension System (NPS) is a defined contribution pension scheme in which the subscriber contributes towards building a retirement corpus. The accumulated corpus is invested in a mix of debt and equity instruments to generate returns. The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is open to all citizens of India, including Non-Resident Indians (NRIs) aged between 18 and 65 years.


History of The National Pension Scheme

The NPS was first introduced for government employees in 2004 and later extended to all citizens in 2009. Initially, the scheme was only open to central government employees, but it was later extended to state government employees and the private sector. The scheme was designed to provide a pension system for employees who joined the workforce after 1st January 2004, as the earlier pension scheme was unsustainable due to increasing life expectancy and retirement age.


Who Can Invest In National Pension Scheme

NPS is open to all citizens of India, including NRIs, between the ages of 18 and 65 years. The scheme is divided into two tiers - Tier 1 and Tier 2. Tier 1 is the mandatory pension account that has restrictions on withdrawals, while Tier 2 is a voluntary account that offers higher flexibility in terms of withdrawals.


When To Invest In National Pension Scheme

It is advisable to start investing in NPS early in life to benefit from the power of compounding. The longer the investment horizon, the higher the accumulated corpus will be. NPS is a long-term investment scheme, and subscribers need to invest for a minimum period of 10 years.


Investment Options In National Pension Scheme

The National Pension System (NPS) offers two investment options - Active Choice and Auto Choice - to its subscribers. Both options differ in terms of asset allocation and fund manager selection, giving subscribers the flexibility to choose the investment option that suits their investment objectives and risk appetite.

    1. Active Choice

Under the Active Choice option, subscribers can choose their own asset allocation and fund manager. Subscribers can choose between three asset classes - Equity, Corporate Bonds, and Government Securities - and allocate their investments accordingly. Subscribers can choose their preferred percentage allocation for each asset class, subject to certain limits set by the Pension Fund Regulatory and Development Authority (PFRDA).

Subscribers can also choose their own fund manager from the list of Pension Fund Managers (PFMs) registered with the PFRDA. The PFMs are authorized to manage the subscriber's investments and provide regular updates on the investment performance. The PFMs charge a fund management fee, which is deducted from the subscriber's NPS account balance.

    2. Auto Choice

Under the Auto Choice option, the asset allocation is based on the subscriber's age, and the investment is automatically allocated between different asset classes. The auto choice option is designed to provide a default investment option for subscribers who do not want to actively manage their investments. The asset allocation is based on a lifecycle fund, which automatically adjusts the asset allocation based on the subscriber's age.

Under the auto choice option, the asset allocation is based on two parameters - the subscriber's age and the risk profile. The investment is allocated between different asset classes based on a pre-defined asset allocation matrix, which is based on the subscriber's age. The asset allocation is automatically adjusted every year to reflect the changing risk profile of the subscriber.


Advantages of Investing In The National Pension Scheme

1. Tax Benefits:

NPS offers tax benefits under Section 80C of the Income Tax Act, 1961, with a deduction of up to Rs. 1.5 lakh per annum. An additional deduction of Rs. 50,000 under Section 80CCD(1B) is available for investments in NPS.


2. Flexibility:
NPS offers flexibility in terms of investment options, where subscribers can choose between different asset classes and fund managers based on their risk appetite and financial goals.

3. Regular Income:
The NPS scheme offers regular income in the form of an annuity after retirement. Subscribers can choose between different annuity options to receive a regular income.

4. Low Cost:
NPS has low operational and fund management costs, making it a cost-effective investment option.

Steps To Invest In National Pension Scheme

1. Open an NPS account:

Visit the PFRDA website or a Point of Presence (POP) to open an NPS account.


2. Choose an investment option:
Select an investment option - Active Choice or Auto Choice - based on your investment objectives.

3. Select a fund manager:
Choose a fund manager based on their past performance and expertise.

4. Make contributions:
Make contributions to your NPS account either through online payment or offline payment.

Conclusion

The National Pension System (NPS) is a voluntary contribution-based pension scheme that aims to provide financial security to individuals in their post-retirement years. The scheme offers two investment options - Active Choice and Auto Choice - to its subscribers. The Active Choice option offers the flexibility to choose the asset allocation and fund manager, while the Auto Choice option provides a default investment option based on the subscriber's age and risk profile. Subscribers can choose the investment option that suits their investment objectives and risk appetite. NPS is a long-term investment scheme, and subscribers need to invest for a minimum period of 10 years to benefit from the power of compounding.


The information provided above regarding the National Pension Scheme (NPS) is for general informational purposes only and is not intended as financial or investment advice. While every effort has been made to ensure the accuracy of the information, we do not guarantee its completeness, reliability, or suitability for any particular purpose. You should seek independent professional advice before making any financial decisions based on the information provided. The use of any information provided is solely at your own risk. We are not responsible for any losses or damages that may arise from the use of this information.




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