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NPS or National Pension System is best defined as a systematic voluntary contribution of pension in India to all the working class employees of the Indian government. Launched on October 10th, 2003, NPS had the sole aim and purpose of providing a source of retirement income for all the citizens of India who worked for the Indian Government. National Pension System wanted to develop and inculcate the habit of saving up funds for when retirement approaches in the citizens of the country.
Initially, it was deemed that only those who were identified as new government recruits were eligible to have a pension fund under the NPS with the exception of armed forces. The reformation was called for as of 1st May, 2009, each and every citizen, even those who work in an unorganized sector on their own voluntary basis could receive a pension fund from the NPS.
To further encourage unorganized workers to save up for retirement, the Central government has launched a sub- contributory pension scheme under the NPS. This sub contributory scheme stated that for each eligible subscriber of the NPS who contributes a minimum sum of one thousand to a maximum of twelve thousand each year, the government shall contribute one thousand rupees to the NPS subscriber. This sub- scheme was named the Swavalamban scheme and is mentioned in the Union Budget of 2012- 2011.
When a person has an NPS accounts, they get access to two different kinds of personal accounts.
This account is primarily for saving up funds and money for retirement. In this personal account, till the age of retirement (60 years), the NPS account holder can only withdraw 20 % of the contributions. The rest 80 % is locked in and is only used to purchase annuities from a life insurance company. The encourages people to have a lump sum amount of savings b the time he or she reaches the age of retirement and will have a number of annuities to his or her name allowing for comfortable retirement into old age.
This second account is a normal saving account from which the PNS account holder can withdraw his or her savings at the point of time without any restrictions. The tier 2account does not have any tax benefits and is solely used for the purpose of storing and housing funds for daily life expenditure and business ventures if any - contributions that mar made to this account, also known as a voluntary savings account, can only be done by the NPS subscriber. Any third party has no access to handling this account whatsoever.
People who are subscribers of NPS often miss out on opportunities to making the most out of the NPS. With the right balance and early start, anyone can take advantage of the NPS and have a lump sum amount of funds for their retirement plans. By taking small and simple aspects of the NPS and its workings, anyone can make the most out of their NPS account.
NPS calculators are online facilities which allow people to calculate the total amount of wealth one can generate for retirement. Using this calculator, NPS subscribers can make a decision of how much to contribute each month to NPS so that at the age of 60, he or she may have a lump sum estimated amount to be used for retirement plans and purposes. The more one can contribute each month; the more benefits will be created and stored as pension wealth. Owing to the monthly compounding of the contributed money and high interest rate, the accumulated wealth makes NPS a highly attractive method of retirement savings.
Depending on the monthly income, NPS subscribers can judge and determine what amount is best suited for them to contribute to the NPS. Using the calculator they can check and see how much wealth will e accumulated at the age of 60 if they continue to deposit the amount which is comfortable for them given their monthly income.
NPS calculators help provide a certain perspective as to how one should proceed with their monthly contributions to their NPS account. This is the best way to start with an NPS account as it will lay out a goal and a path that needs to be followed.
The maximum age till which you have an NPS account is 60 years. This is understandable as the primary aim of NPS accounts is to encourage and ensure citizen to save up funds and money for their retirement. Once he NPS account holder has reached the age of 60, then the accumulated wealth for all the years finally reach its maturity and can be used for retirement plans. The minimum age from which one can have a NPS account is that of 18 years. Having an early start will help the NPS account holder to make the most of the maximum amount of time for which he or she can have an NPS account.
An early start even with a small amount of contribution each month to the NPS account goes a long way. The compounded interest aspect of an NPS account makes every contribution made worthwhile, and the repercussions of them are felt at the time of maturity. It is never too early to start saving for the future and securing oneself financially for long-term prospects.
The prime goal of an NPS is to ensure that the citizens of the country are saving up funds in an active fashion to better their lives and be more comfortable during retirement. For this sole purpose, NPS accounts have strict withdrawal rules and regulations that must be followed by the account holder. These strict regulations ensure that the NPS account holder does not spend and tap into their retirement savings and makes sure that there are sufficient funds for when the maturity ends at the age of 60. Out of the two tiers of the NPS account, the second Tier has no withdrawal limits of specifications. The account holder can withdraw money from his account as per his or her needs without any limitation. The first tier is aimed at accumulating funds for retirement purposes and has certain conditions on the withdrawal prospects. In this tier, before the attainment of 60 years, the NPS account holder can only withdraw 20 % of the contributions. The rest 80 % remains untouchable till the end of the maturity.
After reaching 60 years of age, the NPS holder can tap into the accumulated wealth but still there exist some conditions for withdrawals. After the age of 60, the account holder can withdraw 60 % of the total accumulated wealth for their retirement expenses. The rest 40 % is used to purchase annuities which allow the account holder to have a continued source of pension.
NPS accounts also come with partial income tax benefits. Under Section 80 C of the Income Tax Act, 1961, all NPS accounts are eligible for partial tax exemption. As mentioned earlier, an NPS account has two separate accounts, Tier I and Tier II. The Tier I account is a normal savings account of normal usage and expenditure of the NPS holder’s daily expenses. This account does not have tax benefits to its name. It is the Tier II that has benefits of tax exemption.
NPS account allows partial withdrawals from Tier II in case of certain specific situations. For this, an estimated 25 % of the contributions made by the NPS account holder are exempted from tax. This tax law was passed in the 2017 Budget and since then remained in effect.
When a NPS account holder finally attains the age of 60, he or she can now withdraw 40 % of the total wealth that has been accumulated over the past years. This lump sum amount is completely exempted from taxation as per Section 80 C. In general, an NPS account holder can take you a total of 60 % of the maturity amount from the NPS account when he or she turns 60 years old. The remaining 40 % of the corpus is then used to purchase annuities that continue to give the NPS holder a source of pension from the age of 60. NPS accounts have the tax benefit of having this remaining 40 % which is used to buy annuities to be completely exempted from tax.
Although on should bear in mind that the revenue or income that is generated from these purchased annuities are not exempted from tax. The income generated and received from these pension plans by the NPS account holder is liable to taxation.
Having an NPS account allows people to have a secure future and a concrete plan of action for their own retirements. National Pension System provides the citizens of the country to have a secure and financially stable retirement prospect that they can enjoy when they finally reach the age of 60 and are ready to retire.
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