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The government of India established the Pension Fund Regulatory and Development Authority (PFRDA) in 2003. Under the guidelines of the PFRDA, a defined contribution pension plan called the National Pension Scheme (NPS) became available to government employees in 2004.
This plan was compulsory for central and state government employees joining services after 1st January 2004. It was later made available to private sector employees and eventually to Non-Resident Indians (NRI), too. The plan was not widely accepted by the private sector primarily due to a lack of knowledge and the complexity associated with the scheme.
However, when the proposal of offering an additional tax benefit of INR 50,000 under Section 80CCD(1b) was accepted, this pension plan gained popularity. An increasing number of individuals are now using this scheme as a long-term product during their retirement planning.
Benefits of the NPS
1) Tax advantages: Contributions of up to INR 1.5 lacs may be availed of as tax deductions under Section 80C as per the overall benefit available as per this section. An additional tax deduction of INR 50,000 is available for investors, u/s 80CCD(1b). Another lesser known benefit is available u/s 80 CCD(2). This is available when employers contribute up to 10% of the basic salaries of their employees towards the employees’ NPS accounts.
2) Converting to an annuity: Some people argue that the compulsory conversion of at least 40% of the accumulated corpus on maturity towards an annuity plan is not beneficial. However, this compulsory conversion ensures the investors earn a regular income through pensions, which is important to achieve financial independence and stability during the retirement years.
3) Investing in various asset classes: Subscribers may invest their annual contributions towards different assets, such as government securities, equities, and corporate bonds. This flexibility is not afforded by other tax-saving investments and retirement plans. This choice of financial products allows investors to choose a combination of assets that most appropriately matches their objectives and helps maximise returns under this scheme.
4) Control and flexibility: Contributions are made through Point of Presence (PoP) service providers. Investors may choose one of the several PFRDA-approved PoPs and also move to another service provider if they are unhappy with their initial choice. Moreover, investors may actively choose the amount that must be invested from their overall contributions towards various asset classes within the overall regulations of the PFRDA. Subscribers may alter their investments as per their requirements to maximise the returns and accumulate a larger corpus for a stable future. Alternatively, they may choose a fund manager to invest on their behalf. Investors also have the flexibility to move to another fund manager if they are dissatisfied by the returns earned through the auto choice investment mode.
5) Cost-efficient: Compared to several other tax-saving investments, this pension plan is one of the least expensive. This means that a higher percentage of contributions are invested in the various assets, thus enabling subscribers to maximise their returns. Moreover, the minimum annual contribution to this retirement plan is only INR 6,000, which makes it accessible to most of the working population in the country. The government also offers co-contribution through the Atal Pension Yojana scheme to provide financial security to the lower working class.
Although, there are certain restrictions on withdrawals from the national pension system, the above-discussed benefits make it one of the best retirement plans in India. Including it within your investment portfolio offers several benefits in the long-term, thus allowing you to maintain your standard of living even after retirement.