Basics of National Pension System
The National Pension Scheme (NPS) is a retirement solution that aims to help individuals plan for retirement and help accumulate wealth. Through regular contributions, users can get the provision of a monthly pension in later life. The Pension Fund Regulatory and Development Authority (PFRDA) governs NPS.
Any Indian citizen between the ages of 18 and 65 can open an NPS account.
However, NPS registration is compulsory for all Central Government employees who joined after 1st January 2004. Armed forces are an exception.
How does it work?
The aim of the National Pension System (NPS) is to create a retirement fund. You need to accumulate funds when you are working so that you can use the funds after retirement. So, we can classify it into two parts: the accumulation period and the withdrawal phase.
When you are 60, you get to take 60% of the accumulated corpus as lumpsum. This sum of money is tax-free withdrawal. You need to purchase an annuity with the remaining 40% of the funds. The annuity will take care of the regular monthly payments.
The National Pension System (NPS) offers two accounts for systematic and flexible investments: Tier 1 and Tier 2.
After you open an NPS account, you get Permanent Retirement Account Number (PRAN). The PRAN is required for fund management and making contributions.
Tier 1 NPS Account:
Tier 2 NPS Account:
When you invest in NPS, you have the option in various asset classes, like debt- corporate and government securities, equity and alternative investment funds. Depending on your risk tolerance and age, you get to invest in these different asset classes.
You have two investment options to invest in your NPS Account:
Let’s understand each one of them.
What is Active Choice in NPS?
What is Auto Choice in NPS?
Here’s the asset break up under the different options of Auto choice:
Aggressive:The maximum equity exposure is capped at 75% for individuals up to the age of 35
Moderate : The maximum equity exposure is 50% for individuals up to the age of 35
Conservative : The maximum equity exposure is 25% for individuals with a maximum equity exposure of 50%.
Conclusion: National Pension System is an investment tool that aims to help you build a retirement fund. In this article, we have shared the basics of the National Pension System. Call us to know more about NPS.
This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund subject to market risks, Read all scheme related documents carefully.