Contribute to NPS: All You Need to Know

How Does an NPS Work?

NPS is a pension scheme that allows you to make regular contributions towards your retirement. Professional fund managers manage these investments, ensuring potential growth over time.

At the age of 60, you can withdraw 60% of your corpus from the National Pension Scheme, while the remaining 40% must be used to purchase an annuity. This annuity ensures a steady income stream during retirement. There are two ways to contribute to NPS, each offering distinct benefits. Let's explore the details of the different account options under the National Pension Scheme.

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What are the Account Types Under the NPS?

The NPS offers two types of accounts: Tier I and Tier II. The Tier I account is intended for retirement savings, providing various tax benefits, but withdrawals are restricted until the individual reaches the age of 60. In contrast, the Tier II account has no such limitations, allowing withdrawals at any time.

The Tier I account is mandatory when opening an NPS account, while the Tier II account can only be opened after the Tier I account is active, through a separate application.

Although the Tier I account has restrictions, partial withdrawals are allowed under specific circumstances, such as for medical emergencies, children's education, marriage expenses, or purchasing or constructing a house. The structure encourages long-term saving for retirement.

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What are the Advantages of Contributing to the NPS Account?

Listed below are the key advantages of contributing to the NPS account:

1. Flexibility

   NPS offers great flexibility for subscribers. If you're dissatisfied with the performance of your fund, you have the option to change your fund manager. You can easily download the change request form online or pick it up from your nearest Point of Presence (POP). A small transaction fee applies when changing the fund manager. Additionally, NPS allows you to move your investments between different asset classes, such as government securities, corporate bonds, and stocks.

2. Stabilisation of Risk-Returns

   NPS ensures a stable balance between risk and returns. The scheme limits equity exposure to 75%, but for government employees and senior citizens, this cap is reduced to 50%. As you age, particularly once you reach 50 years old, your equity allocation decreases by 2.5% annually. This gradual reduction helps mitigate risk as you approach retirement, offering a more stable investment path in the long term.

3. Returns

   For Tier I accounts, the minimum contribution is ₹500 per deposit, with a requirement of at least ₹1,000 in total annually. There's no limit to the number of contributions you can make throughout the year. For Tier II accounts, the minimum contribution per deposit is ₹250, with no annual minimum requirement. This provides flexibility for those looking to make smaller, more frequent contributions without a set yearly commitment.

How Helpful is an NPS Calculator?

The power of compounding each month makes NPS a strong choice for retirement. Using an NPS calculator helps you understand the lump sum amount and pension that you will receive when you retire. All you need to do is contribute to your NPS account every month.

Key Takeaway

• Retirement planning can be difficult because it's hard to know how much money you’ll need later.

• You can start by taking the average years post-retirement and multiply that by your yearly spending or income.

• Don’t forget to include extra costs like rising prices (inflation), medical bills, or emergencies.

• A smart move is to use the NPS (National Pension System) as your main savings tool.

• Also, add other savings options to make sure you have enough money for a comfortable retirement