The National Pension Scheme is set up by Government of India, supporting the post retirement life of citizens by providing social & financial security to them.
It aims to inculcate the habit of savings for retirement amongst the citizens. Earlier this pension system is provided only by employers i.e. public & private employers. Whereas the new pension system includes all individual in the country. This scheme is optimal for individuals who want to maintain the standard of life after the retirement. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
Features of New Pension System
- The subscriber will be alloted a unique Permanent Retirement Account Number (PRAN). It will remain same for the rest of subscriber’s life.
- One can claim deduction of upto Rs. 1.5 Lakhs under section 80C of Income Tax Act. The 60 percent of the amount received at completion of retirement is tax-free.
- The investment in the NPS can possibly made via Equity & Debt. The Investment Method vary based on the age of the account holder.
- It provides access to two personal account. The Tier 1 Account is non-withdrawable account, that is meant for savings for retirement. Whereas, the Tier 2 Account is voluntarily savings account. There is no tax benefit available in the later one.
Under NPS you can pick the investment method, considering there are two options available i.e. Active Choice & the Auto Choice. In Active Choice, the investor can choose options as per their choice. There are four options available that offers exposure to Equity (E), Corporate Debt (D), Government Securities (G) & Alternative Investment Schemes (A). The risk in the Equity is high, considering that the returns are also high which correlate with the risk. Albeit, the risk in government securities is low, in view of low return. The Investor can mix E, D, G, A as per their choice in Active Option. You can choose Active Option if you have great knowledge about these asset class.
On the other hand, for non-finance background personnel, you can choose the Auto-choice option. The only difference is that here investment allocation is done based on the investor’s age.
For Example, At the lowest age of entry (18 years), the auto choice will entail investment of 50% of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age 55.
Depending upon the subscriber choice, if one wants more equity exposure, he/she can choose Active choice, or else it is good to go with auto choice.
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