National Pension Scheme (NPS)

The National Pension Scheme or NPS is a voluntary retirement scheme managed by PFRDA (Pension Fund Regulatory and Development Authority) through which you can accumulate a good corpus for your retired life. The NPS was first launched in January 2004, as a compulsory investment scheme for all central government and state government employees (later made optional) and NPS was made available to all private employees from 2009 onwards. People of India (including NRI’s subject to few conditions) between the age of 18 and 65 can take advantage of this scheme irrespective of their employment condition (employed or self-employed).

Types of Accounts under NPS

There are two different accounts to consider under the NPS – Tier I and Tier II. The Tier I account is the retirement account and comes with a lot of tax benefits, but you cannot withdraw your contributions till you reach the age of 60. The Tier II account has no restrictions, and you can take out money anytime you want.

Tier 1 Account - The Tier I account is mandatory when opening an NPS account, you will be required to open an account with a minimum of Rs. 500 and invest a sum of Rs. 6000 annually, and there is no cap on maximum investment annually. Although Tier I has restrictions, there are conditions under which partial withdrawal is allowed earlier, such as cases when the subscriber has a critical illness or needs money for children’s education, children’s wedding expenses, buying or constructing a house.

In some private sector and corporate institutions, the employees are given an option to choose between NPS or EPF. If you opt for NPS, about 10% of your salary + daily allowances along with your employer’s contribution go into it.

Tier 2 Account - This account is a voluntary/optional account, also known as a non-retirement NPS account. A unique feature of this account is that it allows you to withdraw the amount as and when you need it, unlike a Tier-1 account. In tier 2 accounts, neither the Government nor the employers make any sort of investment. To open an account, you will need a minimum balance of Rs. 1000. Tier 2 account holders do not get any tax exemptions.

How to invest in the National Pension Scheme

A few fund managers who deal with NPS policies include the following, 

• Aditya Birla Sun Life Pension Management Limited.
• HDFC Pension Management Company Limited.
• UTI Retirement Solutions Limited.
• SBI Pension Funds Private Limited.
• ICICI Prudential Pension Funds Management Company Limited.
• Reliance Pension Fund.
• Kotak Mahindra Pension Fund Limited.
• LIC Pension Fund

 

NPS invests in 3 types of instruments, Equity, corporate bonds, and government bonds. However, you are provided with the option to pick the allocation into these 3 categories. It can be active, default or auto.

Active option allocates nearly 50% of the money in equity, which is usually preferred by people with high risk appetite

Auto option allocates the funds depending on your age. If you are 35 years or below, then you get a fund allocation where 50 % of your money is put in equity, 30% in corporate debt and remaining in government bonds, as your age increases, the allocation from equity is reduced, and the allocation towards government bonds is increased.

The third option that is the default option allocates 55% in government securities, 40% in corporate securities, 15% in equities and the remaining 5 % in the money market.

Withdrawal procedure after 60

Contrary to common people's belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm. The remaining 60% is tax-free and can be withdrawn.

Tax Benefits of NPS

The NPS has income tax benefits both at the time of paying contributions and at the time of withdrawal on maturity. Individual taxpayers can claim deduction on contributions under Tier I NPS up to Rs 1.5 lakh in a financial year under Section 80C. Further, NPS subscribers can claim an additional deduction for investment up to Rs 50,000 in Tier I account in a financial year under Section 80CCD (1B) over and above the Rs 1.5 lakh deduction under Section 80C. But, contributions to Tier II do not provide any tax benefits.

Find below some useful Links,

NPS Calculator - http://www.npstrust.org.in/content/pension-calculator

NPS account opening link - https://enps.nsdl.com/eNPS/NationalPensionSystem.html