In May 2009, the National Pension Scheme (NPS) was opened to all citizens of the country including the workers from the unorganized sector. This scheme allows individuals to invest in Tier I or Tier II accounts.
Tier I account holders are not allowed to withdraw money until they reach the age of 60 years. In comparison, immediate withdrawals are possible with Tier II accounts.
What is the National Pension Scheme?
The National Pension Scheme (NPS) is a tax-efficient, low-cost flexible retirement plan. It is a defined contribution based scheme offered by the government and it aims to provide financial security to investors, post-retirement.
Here are some important features of NPS that are not known to most investors.
- Defined contribution schemes are primarily those where the returns are not guaranteed. The returns on NPS funds are related to market performance through accumulated dividends and bonuses that are not distributed.
- While most individuals know that anyone between the ages of 18 and 60 can invest in the scheme, Person of Indian Origin (PIO) cardholders, Hindu Undivided Family (HUF), and Overseas Citizens of India (OCI) are not allowed to make investments in this scheme.
- Another less known fact is that Non-resident Indians (NRIs) can invest in the NPS through their banking channels. In addition, they need to adhere to FEMA and RBI requirements.
- Investors are privy to the knowledge that multiple accounts are not permissible for a single individual. A less known fact about investing in this scheme is that joint accounts are also not allowed.
- Before opening an account, it is crucial to understand the National Pension Scheme details and the various intermediaries that play an important role. These include the Point of Presence (POP), Central Record Keeping Agency (CRA), pension fund manager, the custodian, trustee bank, NPS trust, and the regulator.
- The corpus in your NPS account must be converted to an annuity plan, provided by the registered annuity service providers. The Pension Fund Regulatory and Development Authority provides registration to certain agencies for this purpose.
- Another fact that is not well known is that a person with dual citizenship can invest in the National Pension Scheme as long as he holds a valid Indian passport.
- Several investors believe that investing in mutual fund systematic investment plans yields higher returns. However, they are unaware about the lower costs related to NPS investing, as compared to other investment avenues. This makes it a better option for retirement planning.
- Investors are aware of NPS funds being invested in Class E, C, and G assets. However, most do not know the classification of these asset classes. Class E includes index-based stocks, Class C includes bonds issued by public sector undertakings, state government, and private firms, and Class G includes bonds issued by the central government.
- Another one of the less known National Pension Scheme details is that if the contribution is made by the employers, an additional tax benefit is offered under Section 80CCE on up to 10% of their basic salary plus dearness allowance.
Now that you are armed with all of this knowledge you can make an informed decision on investing in the National Pension Scheme. If you are still unsure, contact a financial advisor for assistance and additional information.
