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How to Invest in NPS: Benefits of Investing in NPS

Planning for retirement is essential for every individual who is looking forward to enjoying their retirement life. But only those who plan their retirement beforehand actually have enough financial security to enjoy their r
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Written by

Abhishek Chakravarti
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Abhishek Chakravarti

BFSI Writer

Abhishek is a financial writer with over 6 years of experience in the BFSI sector. Prior to his current stint with Axis Max Life Insurance, he has worked with leading fintech startups. He specializes in writing about taxation and various investment products like ULIPs, retirement plans, guaranteed investment plans, mutual funds etc.

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Sahil Rawal
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Sahil Rawal

BFSI Expert

Sahil Rawal is a digital & brand management specialist with over 10 years of experience in Financial Services Industry. Life insurance professional with expertise in digital marketing strategy, website content marketing and brand communication designed to increase brand awareness, drive engagement & sales.

Why Invest in NPS?

Before we know how to invest in NPS, we must understand what the National Pension System is. NPS is a pension scheme backed by the Government of India and promoted by the Pension Fund Regulatory and Development Authority of India (PFRDA). NPS is a great scheme for individuals who are planning their retirement fund. Since the scheme is overseen by a Government of India body, there is little to worry about regarding transparency about how and where your money is invested.

At superannuation, NPS allows you to have a pension i.e. regular monthly income during your retirement years, making you financially independent even if you no longer have a regular income from a job. Investing in the scheme systematically can make a huge difference during your retirement years, specifically for individuals in private sector jobs. NPS rules are amended regularly to ensure its investor friendly. Therefore, undoubtedly, it is an ideal scheme of investment for your retirement.

Different NPS Accounts

Before you know how to invest in NPS, you should have good knowledge of the scheme to ensure you are making the right decision. There are two types of accounts that you can invest in under the NPS scheme: - Tier 1 and Tier II accounts .

NPS Tier 1 Account

The Tier 1 NPS account is the account to build your retirement corpus. By investing in NPS, you can accumulate money to build a corpus for when you retire.

The moment you open a Tier 1 NPS account, you are allotted a permanent retirement account number, also known as a PRAN. A PRAN is a unique 12-digit number assigned to individuals investing in a Tier 1 NPS account. You can start your account with a minimum investment of Rs 500, and keep the account active, you need to invest Rs 1000 annually. There is no limit to the maximum contribution towards the NPS Tier 1 account. Your investment account is locked till you complete 60 years of age. After this, you can withdraw 60% of your accumulated amount and the remaining 40% has to be invested in some kind of annuity plan from the insurance company, and they will be responsible for paying you a monthly pension. Also, as per section 80CCD of the Income Tax Act 1961 , your investments are tax exempt.

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NPS Tier II Account

A Tier II NPS account can only be opened if you have a Tier 1 NPS account. It is a voluntary investment account that can be opened by making a minimum deposit of Rs 1000. After the account is active, you can make contributions of any amount that you are comfortable with. One of the biggest drawbacks of Tier II NPS accounts is that they are not tax exempt. In other words, Tier II accounts don’t enjoy as many benefits as Tier 1 NPS accounts.

The Benefits of Investing in NPS

It’s essential for the readers to understand the benefits before they understand how to invest in NPS.

Every subscriber investing in this scheme works with a PRAN, which is allotted to every subscriber. The scheme is backed by the Government of India with the aim of making people financially secure during their golden years of retirement. Hence, there are some attractive benefits that one can enjoy by investing in NPS.

· Low-Risk Investment

The scheme is backed by the Government of India regulated body PFRDA, which means that the norms of this scheme are pretty transparent and are also regularly monitored by PFRDA.

· Voluntary

There is no cap on the amount of investment in the NPS scheme. You can make as much of a contribution as possible towards the scheme at any time.

· Economical

Since the minimum contribution required to invest in an NPS account is Rs 500, it becomes a low-cost investment scheme.

· Flexibility

To operate your NPS account, you require a Point of Presence (PoP) to manage your NPS account. The fund managers are in charge of investing your money in various asset classes such as bonds, stocks, and government securities. You have the flexibility to change your PoP anytime during the tenure of the scheme.

· Portable

Your NPS account is not subjected to a particular company, city, or state. You can easily manage your NPS account regardless of where you live, which state you live in, or what type of company you work for.

· Tax Benefits

This is one of the most talked about benefits of an NPS scheme. The annual tax benefits of NPS can be as high as Rs. 2 lakh. This is cumulatively under Section 80C, Section 80CCD and various subsections of the Income Tax Act, 1961.

Key Features You Should Know Before Investing in NPS

Investment experts consider NPS to be one of the greatest schemes on the market because of its stability, numerous tax benefits, and higher returns. An individual can invest in a pension scheme at regular intervals using the NPS scheme. Investing in a retirement scheme is becoming increasingly crucial for paid employees in the private sector who are not entitled to a monthly pension from their employer.

· Withdrawal Rules

The idea behind investing in NPS schemes is to discourage untimely withdrawal as it would affect the retirement fund. However, there is no hard and fast rule of non-withdrawal during the investment period. You can make partial or complete withdrawal from NPS account subject to specific terms and conditions.
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- Quick Account Opening

If you are internet friendly, then you can open your NPS account in less than 20 minutes. You can further read in the article about how to invest in NPS online.

· Flexibility

You can start your NPS account with as low as Rs 1000 annually, but there is no minimum or maximum amount. According to your earnings and expenses, you can invest as much as possible in the scheme. The more you invest, the better return you can get after retirement.

· Easy to transfer

Whether you change a job or city, you don’t have to worry about leaving your accumulated money behind. NPS accounts are easily transferable to other companies and cities.

· Returns

If past is any indication, NPS accounts are known to offer 8% - 10% annually. This kind of return is not possible to get in other low-risk investment schemes.

· Compounding Benefit

Since the money is locked till 60 years, the investor is attached to the scheme for a long period of time.

How To Open an NPS Account?

There are two methods through which you can open an NPS account - Online and Offline.

To open the NPS account online, visit the PFRDA Website and follow these steps:

  • Select “Register with Aadhaar” from the 'Registration' drop-down menu..
  • Enter your Aadhaar number and select "Generate OTP."
  • Your registered mobile number will receive the OTP.
  • Along with your personal information, nomination information, and bank information, enter the OTP.
  • Your Permanent Retirement Allotment Number (PRAN) will be assigned once your application has been successfully filed.
  • The photograph that appears in the 'Photograph and Signature' tab will be the same as the one that appears in the 'Photograph and Signature' tab.
  • Select 'e-signature' from the drop-down menu. An OTP will be produced and delivered to your mobile number once more.
  • To authenticate your signature and make a payment, enter the OTP.

To open an NPS account offline, go to one of the PFRDA-registered Points of Presence (POPs) and pick up a registration form. POPs are banks and financial organizations that have been designated by the PFRDA to provide services to NPS clients.

These POPs handle NPS Scheme subscriptions, fund manager changes, and other NPS-related services. You must fill out basic facts in the application form and supply relevant Know Your Customer (KYC) documents, such as an Aadhar Card, a PAN Card, and proof of address.

Documents Required to Invest in NPS

Now that you know how to invest in National Pension Scheme, here are the documents you would be required to submit:

Find a PoP near you and fill out an NPS subscription form. Fill out the form and attach photocopies of your KYC documents such as your Aadhaar card, PAN card, passport, and so on. If you are a current customer of the bank, you will not be required to submit the KYC documents because your information will already be stored in their database.

Investing-in-NPS-3.webp

Current Returns of NPS and Tax Benefits Offered

The returns in NPS are linked to the market. Therefore, NPS does not have interest rates. NPS is subject to stringent regulation by the PFRDA.

Any NPS subscriber can claim tax benefit u/s 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac u/s 80 CCE. An additional deduction for investment up to Rs. 50,000 in trier-1 NPS account NPS is available under subsection 80CCD (1B). This will be over and above the deduction of Rs. 1.5 lakh available u/s 80C of Income Tax Act, 1961.

Frequently Asked Questions (FAQs)

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Who is eligible to open an NPS account?

How do I know if my bank can serve as PoP?

Is there a possibility to invest in more than one account in NPS?

Is it possible to exit NPS?

What would happen of the NPS account if the account holder dies

When is the best time to invest in NPS?

ARN: Nov23/Bg/08H

Sources:

www.npscra.nsdl.co.in/tax-benefits-under-nps.php

www.financialexpress.com/money/national-pension-system-how-to-open-an-nps-account-online-and-offline-all-you-wanted-to-know/2077704/

www.indiapost.gov.in/financial/pages/content/nps.aspx

npscra.nsdl.co.in/features-and-benefits-of-nps.php#:~:text=NPS%20provides%20you%20two%20types,at%20any%20point%20of%20time

www.incometaxindia.gov.in/pages/rules/nps-tax-saver-scheme-2020.aspx

www.indiapost.gov.in/financial/pages/content/nps.aspx

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