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How Does NPS Work?

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  • 21st Feb 2022
  • 194

How Does NPS Work?

When you think about retirement, vacationing at beach resorts, enjoying lazy days at home, catching up with friends, and more such images conjure up. However, these objectives are attainable if one works hard enough and builds a sufficient corpus. Retirement, a period when you do not have any active income and do not work to make money, is a unique phase and to make the most of it, you must have saved and invested enough money to last the rest of your life, from the day you quit working. Thus, the financial planning for retirement should include the creation of a sizable retirement fund simply because it will cover your expenses throughout your golden years and assist you in sailing through life after retirement without any bumps.

Empowering the citizens, the Government of India created a pension system, encouraging people to save for their twilight years. Regulated by the Pension Fund Regulatory & Development Authority, the National Pension Scheme (NPS) is a voluntary retirement scheme that empowers you to save for your pension or create a retirement corpus. Though the scheme was initially launched only for government employees on January 1st, 2004, it was opened to all Indian citizens from May 1st, 2009.

Keep reading to understand the National Pension Scheme details and how the numerous National Pension Scheme benefits can help you lead a stable post-retirement life.

What is a National Pension Scheme of India?

The National Pension Scheme of India is a voluntary retirement scheme available to all residing or non-residing Indian citizens between 18 and 65. You can join NPS as late as when you are 60 and continue contributing until you are 70.

The list of National Pension Scheme benefits is a long one. You contribute to your retirement account using this simply accessible, low-cost, tax-efficient, flexible, and portable retirement savings fund. The scheme is designed on a defined contribution basis where no defined benefit is available at the time of exit from the system. The accumulated wealth is determined by the contributions made and the income generated from those contributions.

Now that you have a clear idea about what a National Pension Scheme is, it becomes of utmost significance to understand how to apply for National Pension Scheme!

How to Apply for National Pension Scheme?

As a National Pension Scheme subscriber, you must make an initial minimum contribution of ₹500 for the Tier I account and ₹1,000 for the Tier II account. Subsequent contributions and the frequency with which they are made may vary, although under Tier I, a minimum commitment of ₹1,000 must be made yearly, reducing the contribution to ₹250 annually under Tier II.

How to Withdraw from the National Pension Scheme on Maturity?

When you reach the age of maturity, which is 60 years, you can withdraw the entire corpus from Tier I, of which only 60% is tax-free. You must purchase the remaining 40% through an annuity, which is a set amount of money that you will receive every year for the rest of your life. Remember that an annuity is recognised as income, added to other sources of your income and taxed according to your tax bracket. Similarly, Tier II is classified as income and, therefore, the entire corpus is completely taxable.

It’s not convenient to predict exactly how much money you’ll need to go through your golden years without planning ahead of time. Unfortunately, things aren’t that straightforward since you have to account for inflation, unanticipated spending stemming from crises, and a health problem that costs more than your insurance covers. What you can do is use the National Pension Scheme as your primary retirement savings vehicle, enhance it with other available instruments, and avail the National Pension Scheme benefits to establish a retirement fund that meets your needs.

- A Consumer Education Initiative series by Kotak Life

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