Pension schemes are investment plans in which you invest a per cent of your income for returns post your retirement. The objective of investing in a pension scheme is to ensure you have regular income post your retirement. Post-retirement, you may have a large amount of money saved in your account, but that will help you to meet contingent needs. A pension scheme gives you a regular income to meet your monthly or regular expenses.
There are two stages in pension schemes in India:
In the accumulation stage, you pay a monthly/yearly premium amount until you retire. The vesting stage starts once you retire, and in this stage, you start receiving annuities as per the scheme you have invested in.
Indian residents above the age of 18 years and below 65 years of age are eligible to invest in pension plans in India. Also, the person should be KYC compliant.
The best pension schemes in India not only provide you with social security post-retirement but give you tax benefits on your investment. The amount you invest in pension schemes is eligible for a tax deduction, up to a limit of Rs 1.5 lakh.
National Pension Scheme (or National Pension System) is a government-sponsored pension scheme launched in 2004 by the Pension Fund Regulatory and Development Authority of India (PFRDA).
By investing in NPS, you can pay a premium during the tenure of your work life and receive benefits in a form of regular annuity pension policy post-retirement. Features of National Pension Schemes are:
The scheme is open for all employees from the public sector, private sector, and employees from the unorganized sector. The scheme is not open for those who are working in the Armed Forces.
You are eligible for the pension scheme in India if your age is between 18 years and 60 years.
You can make a minimum contribution of Rs 6000 in a financial year. You can either make a one-time payment or pay a monthly instalment of a minimum of Rs 500.
The pension scheme matures at the age of 60 years. However, you have an option to extend it up to 70 years.
You can make a partial withdrawal up to 25% after 3 years of opening the account for situations like a child's education, treatment of critical illnesses, or purchasing a house.
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There are two types of NPS accounts - Tier I and Tier II. Tier I is a default account. When you open an NPS account, the Tier I type account gets opened. Tier II is the voluntary addition to your existing account. In this type, you are allowed to invest and withdraw funds any time you want. A comparison between the two types is as below:
|Feature||Tier I||Tier II|
|Minimum contribution||₹ 1000||₹ 250|
|Maximum Contribution||No limit||No limit|
|Tax Exemption||Up to Rs 2 lakh u/s 80C and 80CCD(1B)||Rs 1.5 lakh for government employees. None for others|
|Employer Contribution||Allowed, Exempt||Not applicable|
There are four types of funds under NPS. You can choose the funds in which you want to invest depending on your risk appetite - low risk, medium risk, or high risk.
|Equity (E)||This is a high-risk, high-return fund that invests predominantly in equity-related instruments. In a short term, it may be volatile but offers good returns in the long term.|
|Government Securities (G)||This is a low-risk, low-return fund that invests in Government securities.|
|Corporate Debt (C)||This is a medium risk, medium return fund that invests a major per cent of total investment in fixed income bearing instruments issued by corporates, State governments, and PSUs.|
|Alternative Investment Funds(A)||In this type, the investment is made in Real Estate Investment Trust (REITs), Mortgage-Backed Securities (MBS), Infrastructure Investment Trusts (InvITs), etc.|
You have two choices to decide the allocation in the four types of funds. The choices are:
In this option, you get to choose the fund type. You can allocate a certain percentage in each of the four types - E, G, C, and A. However, you can only allocate a maximum of 75% in type E up to age 50 and 5% to type A. If you have a low-risk profile, you can make 100% allocation in only type C or G (or both).
You can choose the auto option if you can't decide the funds to choose and the per cent to allocate in them. In this, the allocation dynamically changes as per your age. As you grow old, your investment shifts to a safer option. The investment is made only in E, C, or G types. You have three options to choose from in Auto Choice:
Non-Resident Indians (NRIs) can also open an NPS account and avail all the benefits offered by this pension scheme in India. The age of the NRI should be between 18 and 60 years. NRI must also comply with KYC norms. They can contribute towards the NPS account from the NRE account or NRO account. The minimum contribution required from NRIs is as below:
Below are the features and benefits of NPS for NRIs:
You have an option to open an NPS account both online and offline. You can choose the option as per your comfort. The process is as below for both options.
To open an NPS account offline, the first step is to find a Point of Presence (PoP). The PoP can be a bank also. Next, collect the account opening form, fill in the details and submit the form along with the KYC papers. If you are opening the account through a bank where you already have an account, you don't have to provide a KYC document.
After you make the initial payment, you will receive your Permanent Retirement Account Number (PRAN) from PoP. There is a one-time registration fee of Rs 125 for the process.
NRIs have to follow a few additional steps if they want to invest in the best pension plan in India by opening an account through offline mode:
Opening an NPS account online is simple and hassle-free. You will need your Aadhaar, PAN, and mobile number in the registration process. Below are the steps to open an NPS account:
No. If you have an existing account, you won't be able to open another account. If required, you can transfer your existing account to a different location. You can even change your investment options.
There is no limit on the amount you can invest in Tier-I or Tier-II NPS accounts. However, if you are salaried only 10% of your salary will be eligible for deduction under section 80CCD(1) which is a part of section 80C. For self-employed, this limit is 20% of annual income. You can also claim a deduction on an additional investment of up to Rs. 50,000 under section 80CCD(1B).
Your employer can also contribute to your NPS Tier-I account up to any extent. But only the part within the prescribed limit will be eligible for deduction under Section 80CCD(2). Any excess amount will be taxable as salary income in the year it is invested.
You can follow the below steps to make your contributions in this pension plan in India:
NPS Tier-I account is for your retirement, so the funds are locked up until you reach 60 years of age. However, you have the option of premature withdrawal and exit under certain situations. Even at the age of 60, you can withdraw only 60 per cent of the total amount in a lump sum, while the rest has to be invested in an annuity plan.
You can withdraw 25% of your investment three times (in 5 years intervals) after completion of 3 years for specific requirements like treatment of critical illness, house construction, child's education, etc.
Yes, NRIs can also invest in this pension plan in India by opening NPS account. They have to be between 18 and 60 years of age to open an NPS account.