As a part of pension sector reforms, the Government of India in 2004 introduced the National Pension System (NPS), a structured pension contribution system for retirement. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), NPS is a smart voluntary plan that enables sustainable retirement income. This government initiative aims to provide social security to all the citizens of the country.
How does it work?
NPS is a market-linked scheme managed by professionals. This means that the principal contributions made by investors during the duration of their working life accumulate until the age of retirement and after withdrawal, the growth of the remaining corpus continues via market-linked returns on the annuity plan.
The term “market-linked returns” implies that a certain proportion of the fund invested in NPS is invested in financial securities (equities & stocks) by the respective fund manager. And the individual investor would receive returns on the invested capital in proportion to fluctuations and conditions linked to the market.
In the NPS, only a certain percentage of the corpus can be withdrawn (20 percent before retirement and 60 percent after retirement). The rest of the sum is invested and the subscriber stands to receive a monthly pension post-retirement.
Other features of NPS
Types of accounts: There are two types of accounts offered under NPS- tier 1 & tier 2. Tier 1 account is the account allotted to all subscribers by default and one can choose to upgrade to access added features of a tier 2 account which include permitted withdrawals.
Low Risk: This investment is suited for individuals with a low-risk appetite. When compared to investment in other securities NPS is less risky as there is a 50 percent cap set by the government on the proportion of money that can be invested in equity.
Option to switch fund manager: One can change the fund manager of his/her portfolio if not satisfied with the performance of their pension scheme.
Tax Benefit: One can enjoy tax benefits in NPS under section 80CCD(1) of the Income Tax Act 1961. The provisions vary for a salaried professional and a non-salaried (self-employed) professional.
How to invest?
Any Indian citizen between 18-60 years of age working in either the organized or unorganized sector can invest in NPS. There are authorized entities who can collect funds from “subscribers”, and provide all other services related to NPS across India known as Points of Presence (POPs) which can also be banks appointed by PFRDA.
The process to start investing is quite simple and easy. One can go to a POP and fill a subscriber form. A few documents for KYC compliance need to be submitted and after approval, he/she can start investing through the allotted Permanent Retirement Account Number (PRAN).
Nowadays this process can even be initiated online. An individual can open an account on enps.nsdl.com and become KYC compliant by submitting documents for verification including PAN card, Aadhar card, and linking account to their mobile number.
The National Pension System is one of the pension contribution schemes introduced by the Government of India to promote social security. It is suitable for investors with a low-risk appetite. Since the invested funds are managed by professionals even individuals who are not familiar with the technicalities of financial securities can enjoy benefits.