Through this blog we shall be sharing all the details relating to one long term investment scheme i.e. National Pension Scheme or commonly known as NPS.
So,if you are thinking about retirement planning, do checkout this investment option National Pension Scheme or NPS.
What is National Pension Scheme or NPS ?
National Pension Scheme or NPS is a long term investment scheme introduced by the Government of India to encourage people to save funds and think about their retirement planning. NPS is a defined contribution scheme focused at building a retirement corpus and providing a regular source of income and financial security at old age.
NPS or National Pension Scheme was introduced in the year 2004, firstly for the Government employees. However,in the year 2009,NPS or National Pension Scheme was made open to all the citizens of India between the age of 18 to 65 years.
Important Note : As per amendment dated 1.11.2017 the maximum age for joining NPS has been increased to 65 years (from the earlier age limit of 60 years).So,now an Indian citizen between the age of 60-65 years can also join National Pension Scheme or NPS.
NPS is regulated by PFRDA or Pension Fund Regulatory Authority of India which appoints fund managers to manage your funds.Through NPS,the fund managers invest your money in a broad range of investments like equity,debt,government securities etc.As a subscriber you have the option to invest in various asset classes and earn good returns based on your investments.
NSDL e-governance Infrastructure Ltd. has been appointed by PFRDA, as the Central Record Keeping Agency (CRA) for NPS or National Pension Scheme.
Who can open an NPS Account ?
- Any Individual between the age of 18 years to 60 years irrespective of whether they are government employees or not can opt to invest in NPS Account.
- NRI or Non Resident Indians have also been allowed to invest in NPS.
While NPS is compulsory for central and state government employees.It is optional for other eligible citizens to invest in NPS.
In case of non government employees,you can join the NPS Scheme on individual basis or through your employer,if the employer being a corporate has opted for the Corporate sector Model NPS Scheme.
What are Type of Accounts in NPS or National Pension Scheme ?
Under NPS or National Pension Scheme 2 types of Pension Accounts are there :
(i) NPS Tier I Account :
This is basically your Pension account where you contribute to build a retirement fund. You contribute to NPS account with certain restrictions on withdrawal.So,this is basically a non-withdrawable account till retirement where subscribers are not allowed to withdraw funds.
In case of Government employees,the employee contribution is 10% of Basic Salary+Dearness Allowance with equal contribution from employer.
The minimum annual contribution for NPS Private Sector Tier I has been reduced to Rs.1000.This limit was Rs.6000 earlier.
At the age of 60 years,you can withdraw only 60% of the corpus,rest 40% is to be used to purchase annuity from approved life insurers.
(ii) NPS Tier II Account :
This is simply an add on account which is a voluntary savings/investment facility.You can withdraw from this Pension account any time without any restriction.There is no minimum investment limit and no minimum balance requirement for NPS Tier II Account.
However, NPS Tier I Account is a pre-requisite to open NPS Tier II Account.So,you need to have an active NPS Tier I Account before opening NPS Tier II Account.
IMPORTANT AMENDMENT : As per PFRDA circular dated 9th August 2016,the minimum annual contribution has been reduced to Rs.1000 under NPS Private Sector Tier I Account.The minimum annual contribution of Rs.250 and maintaining a minimum balance of Rs.2000 at the end of the financial year in case of NPS Tier II Account has also been waived.
Where is your money invested in NPS ?
In NPS your money is invested in different asset classes as per your choice in :
(i) E – Equity : This is a “High return,high risk” fund that invests in equity.
(ii) C – Corporate Debt : This is a ” Medium return,medium risk” fund where the fund invests in fixed income securities : e.g. liquid funds,corporate debts etc.
(iii) G – Government Securities : This is a “Low return,low risk” fund where investment is done purely in Government Securities. e.g. GOI Bonds,State Govt.bonds.
If you don’t want high risk and just play safer, you can invest in C or G asset classes as per your choice.But,if you can afford high risk and want equity exposure,you can invest in E Asset class also.
Here,one thing to know is that as far as equity is concerned, you can put upto a maximum of 50% in asset class E-equity.
You have 2 choices to invest your money :
- Active Choice : You can opt to manage the distribution to different asset classes yourself and specify the percentage to be invested.Through active choice,you can design your own portfolio based on your risk horizon.
- Auto Choice : In case it is difficult for you to manage your portfolio yourself, NPS also gives you the auto choice where asset allocation is done by the system automatically.Your contribution will be invested in different asset classes as per percentage allocation given by PFRDA,based on your age.At a young age,a larger share will be invested in higher risk asset class E-equity, as you grow older and head towards retirement,the maximum amount will be invested in low risk funds like government securities.
Who are fund managers ?
Fund mangers are basically organisations that manage your portfolio as per the goals of the fund.You have to choose a fund manager while opening NPS Account.
Presently,there are 7 fund managers appointed by PFRDA, who manage the overall NPS amount :
- LIC Pension Fund
- SBI Pension Fund
- UTI Retirement Solutions
- HDFC Pension Management Company
- ICICI Prudential Pension Fund
- Kotak Mahindra Pension Fund
- Reliance Pension Fund
The Government funds are managed by LIC Pension Fund,SBI Pension Fund and UTI Retirement Solutions.
The annuity to be bought at retirement should be from one of the PFRDA approved insurers.These insurance companies are as follows :
- Life Insurance Corporation of India (LIC)
- SBI Life Insurance
- HDFC Standard Life Insurance
- ICICI Prudential Life Insurance
- Reliance Life Insurance
- Bajaj Allianz Life Insurance
- Star-Daichi Life Insurance
What is PRAN ?
PRAN or Permanent Retirement Account Number is a unique number provided to the individuals who subscribe to National Pension Scheme.This is a portable number that is allotted on successful registration to NPS and remains with you throughout.
Simply stated,PRAN card is a document containing a PRAN, Subscribers name, his father’s name, photograph and signature/thumb impression.
How to open NPS Account ?
You can open NPS Account in any of the 2 ways :
1. Open NPS Account Offline : Find your Point of Presence(PoP) and fill and submit the subscriber registration form,complete the KYC (Know Your Customer) details,select your fund manager,asset allocation and make the contribution .You will be issued a unique PRAN or Permanent Retirement Account Number that is a portable.
Here,Point of Presence(PoP) refers to the banks or intermediaries that help you to subscribe to NPS and receive NPS Contributions from you.Almost all the major banks provide this service.
2. Open NPS Account Online or eNPS :
Steps are being taken by the government to make the National Pension Scheme more popular.Another step towards this is the development of an online platform for registration and contribution to NPS.
You can now open NPS Account at the click of a button that is also known as eNPS where you can register and contribute online.You just need to visit the eNPS portal at enps.nsdl.com and open your NPS Account by following the requisite steps.The same can be done either by using :
- PAN or
If you choose PAN option while applying online,your PRAN activation is subject to KYC verification(this is not required in case of Aadhar option).
You just need to have a Bank account,net banking facility enabled,a mobile no.and email id.Fill the details required online,scan and upload your photograph and signature and finally make an online contribution.
However,you need to print the NPS form,paste a photograph,sign it and submit it to CRA which is NSDL within 90 days.
*Non-Resident Indians or NRIs interested in opening an NPS Account also have the option to open their NPS accounts online through eNPS portal, provided they have a PAN card or Aadhaar Card.
What are the Tax benefits on NPS or National Pension Scheme ?
The tax benefits on NPS that can be availed under The Income Tax Act,1961 are as follows :
(i) Section 80CCD(1) – Employee’s contribution : This deduction is allowed to an Individual who makes deposits to his/her Pension account. The maximum amount of deduction allowed is :
- 10% of salary i.e.Basic pay + Dearness allowance (in case the taxpayer is an employee) or
- 10% of Gross total income (in case the tax payer is self-employed) or
- Rs 1,50,000 whichever is less.
(ii) Section 80CCD(1B) – This deduction is for self contribution to NPS or National Pension Scheme. From F.Y.2015-16 a new deduction under Section 80CCD(1B) has been introduced for providing an additional deduction of Rs.50000 for the amount deposited by an individual to his NPS Tier I Account . This deduction is over and above the Tax deduction U/s 80 C.
(iii) Section 80CCD(2) – Employer Contribution : Deduction is allowed for employer’s contribution to employee’s pension account up to 10% of the salary(Basic pay + DA) of the employee. There is no monetary ceiling on this deduction.This is available to salaried individuals only.
*Tax benefits are available for contributions made towards NPS Tier I Account only.
An important point to note here is that :
Maximum Tax deduction Under Section 80 C, Section 80 CCC and Section 80 CCD(1) can be Rs.1.5 lakhs only.
And this Deduction Under Section 80CCD(1B) is an additional deduction of Rs.50000 only for investment in NPS and not any other investments.
This additional benefit of Rs.50000 to NPS is over and above deduction of Rs.1.5 lakhs under section 80 C.
Hence,total tax benefit for investing in NPS : Under section 80 CCD(1)+ section 80CCD(1B) can be availed to a maximum of Rs.2 lakhs
What are the Withdrawal Rules for NPS ?
Now coming to the withdrawal rules,following are the options :
|If you want to exit NPS at 60 years age i.e. at maturity||You will have to use 40% of your funds to buy annuity.The remaining 60% can be withdrawn by you.|
|If you want to exit NPS before 60 years of age||A minimum of 80% of your pension fund should be invested in annuity.You can withdraw 20% of your funds.|
But,partial withdrawal before maturity is allowed subject to certain conditions and for specified reasons.One basic condition for partial withdrawal is that you should be in NPS for at least 10 years and you can withdraw a maximum of 25% of contribution made by you.
So,for availing the maximum benefits,it is prudent to withdraw at maturity only.
How much tax is payable on the NPS amount received at retirement ?
As per the Budget 2016,the withdrawal from NPS at maturity has been made tax-free upto 40% of total accumulated funds.
This has been an important step in making the NPS or National Pension Scheme more attractive for the potential investors.
However,the rest 60% of the corpus will be treated taxable income as per The Income tax rules.
NPS is basically of EET nature unlike Public Provident Fund(PPF) and Sukanya Samriddhi Yojana(SSY) that are of EEE nature.This means contribution and interest earned are exempt from tax but maturity amount is not fully tax free.
Although,you can withdraw 60% of your corpus at maturity and 40% is used to buy annuity.But, if you withdraw 40% of your NPS corpus and remaining 60% is used for annuity purchase at the time of your retirement, you don’t have to pay any tax at that time. But,the annuity income that you will receive in the subsequent years shall be subject to income tax.
Is NPS a good long term investment option ?
NPS,a long term investment option has been introduced to encourage individuals to take a step forward towards their retirement planning. NPS aims at providing adequate financial security to a person in that period of your life when you grow old and retire.
Being a government scheme,it seems a reliable long term investment alternative.The returns are based on performance and type of funds chosen.Looking at the minimum contribution requirement,the tax benefits available it seems to be a good long term investment scheme.
But,it has few major drawbacks like very long lockin period,taxability of 60% corpus,restriction on investment in equity etc.This might incline the investors to look for other long term investments as well.
Anyways,it is a good initiative taken by the government to help individuals save some money for their retirement.
However,you are the best judge to decide and plan your investments in the right direction towards achieving your financial goals.
Through this blog we have tried to cover all the major aspects and features and all possible queries regarding NPS or National Pension Scheme.
If you like it, do share it with your family and friends, after all they should also have an opportunity to grab this useful piece of information.
Feel free to share your valuable feedback and any queries thereon in the comment section below…
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