New Pension Scheme (NPS) is a voluntary pension scheme introduced by the Government of India under the Pension Fund Regulatory and Development Authority (PFRDA) to provide social security to citizens. The scheme is available to all citizens of India between the age of 18 and 60, including NRIs.
Eligibility for NPS
The eligibility criteria for NPS are simple. Any individual who falls in the age bracket of 18 to 60 years can invest in the scheme. However, there are some exceptions to this rule. Government employees who joined the service before 2004 and are eligible for pension benefits are not eligible for NPS. Also, if a person has already subscribed to any other pension scheme, they cannot invest in NPS.
Investment in NPS
NPS offers two types of accounts- Tier 1 and Tier 2. Tier 1 account is a mandatory account that is meant for retirement planning. On the other hand, Tier 2 account is a voluntary account that allows withdrawals at any time.
In the Tier 1 account, the investor has to make a minimum contribution of Rs. 500 annually or Rs. 1,000 semi-annually. The maximum investment limit in the Tier 1 account is Rs. 2 lakhs in a financial year. However, there is no limit on the number of contributions that can be made in a year.
In the Tier 2 account, the minimum contribution is Rs. 1,000 at the time of account opening and a minimum of Rs. 250 for each subsequent contribution. There is no limit on the maximum investment in the Tier 2 account.
The investor has the flexibility to choose the investment option in the NPS. There are two types of investment options- Active choice and Auto choice. In the Active choice, the investor can choose the allocation of funds across equity, corporate bonds, and government securities. In the Auto choice, the allocation is done automatically based on the age of the investor. As the investor gets older, the allocation shifts from equity to debt instruments to reduce the risk.
Exit options and redemption in NPS
Exit from NPS is possible under different circumstances such as retirement, death, and premature withdrawal.
Retirement: If the investor is 60 years old, he/she can exit from NPS. In this case, the investor has to invest at least 40% of the corpus in an annuity plan. The remaining 60% can be withdrawn as a lump sum or in a phased manner over ten years.
Death: In case of the investor’s death, the nominee can claim the corpus. The nominee can choose to receive the entire amount as a lump sum or opt for a pension plan.
Premature withdrawal: The investor can withdraw up to 25% of the corpus after three years of investment for specific reasons like marriage, education, or treatment of critical illness. However, the withdrawal is subject to certain conditions and penalties.
Redemption options in NPS
NPS offers two types of redemption options- Lump sum and Annuity.
Lump sum: The investor can withdraw the entire amount as a lump sum after attaining the age of 60 years. In this case, at least 40% of the corpus has to be invested in an annuity plan.
Annuity: In the annuity option, the investor can invest a certain percentage of the corpus in an annuity plan, which provides a regular pension to the investor. The annuity can be received monthly, quarterly, half-yearly, or annually.
Conclusion
NPS is a great investment option for those who want to plan for their retirement. The scheme offers flexibility in investment options and has different exit and redemption options. The investor has the choice to choose the investment