Over the years, the world has witnessed an improvement in human life expectancy, currently at an average of around 73 years. With increased longevity comes the added years in retirement. Hence, planning for life after retirement has become even more critical.
In India, most people retire around the age of 60-65. To help them plan for their post-retirement years, the government-sponsored National Pension System (NPS) is one of the few social security schemes. Initially launched only for government employees, the pension scheme was later opened to all sections of the population. Today, any citizen of India between 18 to 60 years of age can subscribe to the NPS.
NPS is a great tax-saving retirement fund and the perfect long-term investment tool. Under the NPS, there are two types of accounts - Tier I and Tier II, the former being mandatory and the latter a voluntary or additional one.
The NPS Tier II is a voluntary account that can be opened only if you have a Tier I account. When opening an NPS Tier II account, you are required to contribute a minimum of ₹1,000. However, there is no mandatory annual contribution requirement in a Tier II NPS account, unlike a Tier I account, where a subscriber must contribute a minimum of ₹1,000 each year. The only thing to note is contributions made to a Tier II NPS account must be in multiples of ₹250, with no cap on the maximum contribution made.
A Tier II NPS account offers greater flexibility in withdrawal, and no exit load is charged when you withdraw funds from your Tier II NPS account. However, NPS Tier II investments are not tax-free.
When you put your money into the National Pension Scheme, you have four asset classes to invest your corpus: equity instruments, government securities, corporate bonds, and alternative investment funds. Again, there are two ways to manage asset allocation: active choice or auto choice. In active choice, you get to decide and customise your portfolio depending on your risk profile and knowledge of asset classes. The NPS offers the auto choice option whereby you can go with an automatic allocation portfolio for those who do not wish to enter the portfolio designing process.
A few key advantages of a Tier II NPS account are listed below:
Listed below are the eligibility criteria for opening an NPS Tier II account:
Note: The NPS Fund managers' fees have been increased from 0.01% to 0.09%. This is a minimal increase to ensure that the pension fund is financially sustainable for management. NPS fund managers may now invest in IPOs and select from over 200 stocks (earlier than the top 100 stocks).
Following the COVID-19 pandemic, the number of subscribers and the value of both NPS and Atal Pension Yojana surged by 30%. This increase is attributed to more people seeking financial security for their retirement.
Click here to open an NPS Account now!
You can read more on how to claim tax benefits on Tier I and Tier II NPS accounts here.
*Terms and Conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice before you take any/refrain from any action.