Primer on NPS

The population of people more than 65 years old in India is growing at the fastest rate at the moment. Yet, according to a survey done by RBI, only 23% were saving or planning to save for their retirement. 7 out of 10 Indians expect their children to support them in their retirement. These alarming figures tell us how important it is to start saving for your retirement. With the burden on the head to save for healthcare which only increases as you age and also a chance to pursue your passions and have new adventures after your retirement it is high time to make the most of it by planning ahead.

What are the government measures taken for this problem?

The government realizes this as a problem and came up with NPS which stands for National Pension Scheme. The government of India established the Pension Fund Regulatory and Development Authority (PFRDA) on 10th October 2003 to develop and regulate the pension sector in the country. The National Pension System (NPS) was launched on 1st January 2004 with the objective of providing retirement income to all the citizens. NPS aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens. The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of the subscriber’s life. This unique PRAN can be used from any location in India.
PRAN will provide access to two personal accounts:
· Tier I Account: This is a non-withdrawable account meant for savings for retirement.
· Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.

What are the benefits of NPS?

NPS offers you to avail of tax benefits. If you choose to invest in the National Pension System (NPS), you will be eligible to get tax deduction benefit up to ₹2 lakhs— ₹1.5 lakhs under Section 80C of the Income-tax Act, 1961 (if that’s your only investment under that basket) and an additional and exclusive benefit of ₹50,000 under Section 80CCD (1B) (for investment in tier-1 NPS account). Let alone the tax-saving aspect, there are various other benefits of NPS. NPS offers flexibility in the selection of a Fund Manager, who will manage the benefactor’s funds. Also, the option to switch fund managers from one to another is available. As NPS is a market-linked investment scheme, it provides the option to the investor to choose stocks, government bonds and, other securities as they please. Till the retirement, pension wealth accumulation grows over the period of time with a compounding effect. The account maintenance charges being low, the benefit of accumulated pension wealth to the subscriber eventually becomes large. The NPS account is manageable online. An NPS account can be opened through the eNPS portal. Further contributions can be also be made online through the portal. Once the PRAN account is opened, an online login id and password are provided to the subscriber. He/she can log in and view/manage his NPS account online.

Let us compare the yield of Rahul who started investing Rs.1000 per month at the age of 30 vs at the age of 20 
Note: Expected returns are assumed conservatively at 10% and, 50% of the corpus is allocated for the annuity

Case 1: Rahul starts investing at the age of 30.

 Total corpus: Rs.22,79,326
 Lump sum value: Rs.11,39,663
 Expected Monthly Pension: Rs.5,698


Case 1: Rahul starts investing at the age of 20.

Total corpus: Rs.63,76,781
Lump sum value: Rs.31,88,391
Expected Monthly Pension: Rs.18,599


We can see how Rahul missed out on the extra Rs.40,97,455‬ if he had started investing at the age of 30 instead of 20. The reason behind this is the power of compounding. So, it best to start investing as early as possible.

How do I start investing in NPS?

How do you open an account for NPS? It’s quite lucid. Submit duly filled UOS S1 form to open a Permanent Retirement Account (PRA) (Tier I and/or Tier II) in NPS with other supporting KYC documents to POP-SP. POP-SP will validate the form and provide a receipt number to the subscriber. It is that simple!

With the benefits prospects and the need of the hour to save for a comfortable retirement, NPS looks like a very attractive option. We at Dreamladder Capital, provide financial advisory not just for the coming future but also for the future that lies way ahead in life. We recommend to have a sound knowledge of financial literacy to give yourself the future you want and these blogs are a tiny bit to help you achieve your dreams.