National Pension Scheme (NPS): Easy Retirement Planning

Breezy air flowing through my hair and sweet orange juice in hand while vacationing in an exotic foreign location- that is my vision of a perfect retirement. 🍹 We all have something planned for what we would like to do in our retirement years. Many think of buying a gorgeous house, while others, like me, wish to explore the different corners of the world. Retirement for Indians typically begins at age 58 or 60 but can vary depending upon the goals of individuals.

But, a sad revelation shows that among India’s population of over 143 crore, only 32% have started saving for retirement. The rest are living under the delusion that earning a good salary and saving a little percentage every month is more than enough to make do for later years. As per an ICICI Prudential Life Insurance study titled “Is India prepared for retirement?”, an average corpus of ₹65.4 lakh is considered the ideal sum for retirement.

Saving such a large amount by setting aside a certain percentage of your monthly salary won’t be enough. Over time, the purchasing power of money decreases, reducing the value of what you saved 10 or 20 years ago by half. That’s inflation for you!

Therefore, pooling your money in several investment options with promising returns and a lock-in period is considered the right call for retirement corpus.  

There are several annuity products and other options, but the National Pension System (NPS) is one of the best among them. This government-backed scheme contains a variety of benefits for both salaried and self-employed individuals, helping generate a mountain of savings for the upcoming years. Thus, achieving your desired retirement is only a few steps away.

National Pension System: Its Importance

As per the provisions of the Indian Trusts Act of 1882, starting a businessthe National Pension System was established by the Pension Fund Regulatory and Development Authority (PFRDA). It falls under the jurisdiction of the Ministry of Finance.
It was launched as a pension plan for government employees in 2004 but was opened for individuals from all sections in 2009. PFRDA started celebrating October 1 from 2021 as the NPS Diwas to boost the public's awareness of retirement planning.

Since its launch in January 2004, the scheme has been very successful, with a year-on-year (y-o-y) increase of 22.88% in the number of subscribers between 2022 and 2023.

The infographic above shows how more and more people subscribe to NPS every year. So, are you a part of this number? If not, then why not? 🤔

If the numbers above and my argument got you wondering how much to save for retirement? Then, let me provide you with the simplest solution.

Let's go with the 50-30-20 rule. Your expenses should be at most 50% of your monthly salary, and your wants should be summed up as 30%. As for the leftover 20%, this is the amount you must save. If you follow this rule diligently, you will be able to conjure a bulky retirement corpus years before the planned time. Everything would feel like magic after that! 🪄

Now that it’s clear how much capital is needed to reach your individual retirement goals, it’s time to discuss why NPS is the best choice over others. As per ICICI Prudential Life study, around 41% of the Indian population will be retirement-ready by 2030. To reach this goal, PFRDA decided to use a unique method for this year’s NPS Diwas celebration. Let’s see which benefits they preached and whether they are worth your salary’s 20% portion.

New Development in NPS: Green Light to Partial Withdrawing

The Pension Fund Regulatory and Development Authority (PFRDA) has updated its regulations on partial withdrawals within the NPS. This move, outlined in a master circular dated 12 January 2024, offers subscribers increased flexibility in accessing their retirement savings while ensuring adherence to all relevant legislation.

Subscribers can access up to 25% of their own contributions (after meeting some requirements) for specific events and conditions like education, marriage, housing, medical emergencies, self-development, or starting a business.

Members of 3-years from date of joining the scheme are eligible for partial withdrawing from NPS. A total of 3 partial withdrawals is allowed during the complete tenure of the subscription scheme.

Logging into your National Pension System (NPS) account and checking your balance got a security upgrade! Here's what you need to know:

• Stronger Login: Two-factor Aadhaar authentication is now required, adding an extra layer of security to protect your account.
• What it Means: In addition to your user ID and password, you'll also need to verify your identity using Aadhaar for secure access. This helps prevent unauthorized login attempts.

How to Login with Two-Factor Authentication:

• Visit the official NPS website.
• Click on "Login with PRAIN/IPIN."
• On the new page, select the "PRAIN/IPIN" tab.
• Enter your User ID and Password.
• Complete the Captcha verification.
• Follow the prompts for Aadhaar authentication (fingerprint scan or OTP). OTP will be received in your Aadhaar registered mobile number.
• Submit the OTP received to login.

o protect your account, NPS CRA will lock it after five failed password attempts in a row. Don't worry, you can still regain access via resetting using your secret question or requesting a new I-Pin.

5 Benefits of the National Pension Scheme

PFRDA featured many benefits of NPS on social media. Among the many advantages, here are the top 5 that make NPS the perfect retirement solution for all:

1. Tax Benefits up to ₹2 lakh

As per Section 80C of the Income Tax Act, 1961, NPS allows tax exemption of up to ₹2 lakh. This exemption is bifurcated into the tax deduction of up to ₹1.5 lakh from the taxable income and an additional ₹50,000 under Section 80CCD (1B). This is applicable for both salaried and self-employed individuals with a slight difference. Where salaried employees can claim tax deductions up to 10% of their salary, self-employed individuals get to claim 20% of their gross income (subject to a maximum of ₹2 lakh).

In short, you can be both a diligent citizen who pays taxes and a smart individual who saves up a certain amount on tax. Wonderful, right?

2. Versatile & Portable Investment Options

NPS solves one of the biggest troubles people face when the word “investment” gets introduced into the mix. Finding the right investment option is what beginners find the most difficult to deal with. This gets easier with NPS as there are a multitude of options available. Whether you prefer equity, debt, or government securities, you can choose any one or more. You can also get a mix of equity-debt or debt-bond and prepare a diversified NPS portfolio.

In short, your retirement plan is in your hands! 🙌

Another benefit that makes NPS such an incredible investment opportunity is its portability. Many of us are either thinking of switching jobs or might do so in the future. As employers provide NPS for their employees (especially for government employees), people are often found wondering what would happen to their NPS corpus after they change jobs.

Well, NPS is a portable option that allows transferring accounts along with jobs. You can shift your Permanent Retirement Account Number (PRAN) from one sector to another, e.g. Central Government to Corporate sector, State Government to Central Government, etc., and vice versa.

So, you can take your NPS corpus with you wherever you go by following basic steps.

3. Regular Stream of Income in Retirement

Unfortunately, about 68% of Indians don't have a retirement saving plan for themselves. Most have the notion of depending on their children, pension, and other meager savings. The report "India's Money Habits" by Finology Recipe shows a unique picture of the spending habits of our nation.

From our deepest, darkest desires, one ludicrous yet luxurious wish is receiving a steady stream of income without doing any work. With NPS, this dream can be accomplished with ease. You can withdraw a lump sum amount from your retirement corpus, around 60% at once, and receive 40% of the leftover amount as an annuity. Thus, whether you have plans to go on a world tour or buy a gorgeous villa, make them all come true during your retirement days.

After all, we deserve to enjoy the fruits of our hard labour through a stable monthly allowance supporting a comfortable way of living.

4. Low-Risk Retirement Saving Plan

NPS is a low-risk investment option, and the reasons for that are many. First is that the government backs this scheme. So, the likelihood of it generating a negative return or failing is close to nil. Another reason is that this scheme contains a low equity exposure. In the diversification, an individual can invest up to 75% of their savings in equity under NPS. Thus, the probability of NPS being influenced by market fluctuations is much lower than other options in the market.

Alas, this point also reduces the possibility of receiving high returns, but to gain something, we should be ready to lose one thing or more, right? 😉

A plus point of choosing NPS is that this scheme is managed by experts in the field, AKA PFRDA-registered pension fund managers. These experts invest the subscribers' funds in securities prescribed in the investment guidelines issued by PFRDA and the investment policy approved by the Board of Pension Fund. It's like getting the "Audience Poll" lifeline from Kaun Banega Crorepati. Success becomes 90% guaranteed!