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National Pension Scheme

What is the NPS (National Pension Scheme)?

National Pension Scheme (NPS) is a pension cum investment scheme launched by the Government of India to provide security at the time of retirement to Citizens of India. It is an attractive long-term saving avenue to effectively plan your retirement through investing in different asset classes available under NPS. One can open two types of accounts under NPS: Tier 1 Account and Tier 2 Account. The Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA). Previously, NPS was only available for Government Employees but now the PFRDA has made it available to all citizens of India. It is a voluntary contribution investment option where returns are market-linked and funds are managed by professional fund managers.

Who should invest in NPS?

NPS can be ideal for someone who is looking for:

  • A low-cost product
  • Tax benefits for Individuals, Employees and Employers
  • Attractive market-linked returns
  • Professional management by experienced Pension Funds
  • Investing for a long-term period considering NPS(Tier 1) has a lock-in and needs regular income during the post-retirement period
  • Flexibility in terms of selecting an asset allocation

NPS Benefits and Features

Following are the NPS Features and tax benefits available to you if you choose NPS as an investment option.

  1. Flexibility: 

Investors can select the asset classes according to the options available, select the Pension Fund Managers as per their wish and make investments at any time of the year.

  1. Economical: 

NPS is a low-cost product compared to other investment instruments offering such features.

  1. Tax Efficient: 

Offers tax benefits for Individuals, Employees and Employers

  1. Returns: NPS offers market-linked returns and the investor has an option to change the pension fund manager once a year if they are not satisfied with the performance of the fund.
  1. Regulated Instrument: 

NPS is regulated by PFRDA which is constantly monitoring to ensure that guidelines are being followed and transparency is maintained.

  1. Premature Withdrawals: 

It is mandatory for an investor to invest in NPS till the age of 60 years. However, partial withdrawals of up to 25% of the contributions made are allowed after 3 years from the date of account opening. And this restriction is only applicable for Tier 1 Accounts. 

  1. Withdrawal at 60 years: 

The investor has to take an annuity of at least 40% of the accumulated corpus and the rest can be withdrawn as a lump sum.

These NPS benefits and features can help you to make investment decision. For more details let’s discuss NPS tax benefit in detail. 

NPS Tax Benefits

Let’s discuss available NPS deduction in income tax act. NPS Tier 1 and 2 tax benefits are not same. You can claim a deduction against your National Pension Scheme investment only for investments done in Tier 1 account, so while investing do keep this in mind.On NPS tier 2 tax benefits are not available for contribution made. Following are NPS tax benefits:-

  • Tax Benefits under Section 80C- It is one of the listed investment options in which you can get NPS deduction by investing and saving tax under Section 80C. The deduction limit for this section is Rs. 1.5 lakhs
  • Tax Benefits under Section 80CCD (1B)- This is an additional tax benefit given only to NPS investors. Under this section, you can claim an additional tax deduction for your investments up to Rs 50,0000 that is over and above the deduction under Section 80C.

So, you can claim a tax deduction of up to Rs 2 lakh by investing in NPS.

  • Tax Benefits under Section 80CCD (2)- This benefit can be availed on the contributions made by the employer, hence, this one is meant for the salaried individual and not self-employed. Government employees can claim 14 per cent of their salary tax deduction under this section. Meanwhile, for private-sector employees, it is capped at 10 per cent of their salary.
  • So, is NPS tax saving option? Absolutely yes, as it help you to save tax on your total taxable income. 

Types of account under NPS

The Tier 1 Account is like a pure retirement plan that comes with a lock-in period of 60 years of age and it’s like a mandatory account when you invest in NPS. A minimum contribution of Rs.1000/- year is required but there’s no upper limit on investment. The subscriber can select the asset allocation from the 4 asset classes available: Equity, Government Securities, Corporate Bonds and Alternative Investments. The above-mentioned tax benefits are available for Tier 1 Account only. 

Now, coming on to Tier 2 Account, it’s more like a savings cum investment account where there’s no restriction on withdrawals and minimum balance. To open a Tier 2 Account, having a Tier 1 account is mandatory and you can choose your asset allocation from 3 asset classes: equity, corporate debt and government securities. You cannot avail of any tax benefits by investing in this account.

BasisNPS Tier 1 AccountNPS Tier 2 Account
EligibilityAny Indian Citizen in the age group 18-70Having a Tier 1 Account is mandatory
StatusMandatory for everyone who invests in NPSIt’s Voluntary 
Type of PlanPure Retirement PlanSavings and Investment Account
Minimum Initial Contribution at Registration₹500₹1000
Minimum Contribution per year₹1000No minimum balance required
Maximum ContributionNo limitNo limit

Asset Classes available under NPS and its allocation:

Asset Class E: Investments predominantly in Equity market instruments.

Asset Class C: Investments in fixed income instruments other than Government securities.

Asset Class G: Investments in Government securities

*Asset Class A: Investments are being made in instruments like InvITs, REITS, AIFs, etc. (only available for Tier 1 Accounts) 

Asset Allocation can be selected by the investor from the given two choices: Active and Auto choice

Active Choice: For NPS Subscribers who wish to decide the asset allocation on their own.Auto Choice: It is a default choice for those who find it tough and need some advice/handholding to decide the proper allocation. Allocation is decided based on the lifecycle and has 3 options: Aggressive, Moderate and Conservative

How to open an NPS account?

To invest in NPS, you can open an account with a Point of Presence (POP) or online through the eNPS platform.

You can open an NPS account online through eNPS if you have one -.

(i) Aadhaar Card, or

(ii) PAN card with Savings accountwebsite www.npstrust.org.in

After linking your account to your PAN, Aadhar, validate the registration by entering the OTP received on your device. A Permanent Retirement Account Number (PRAN) will be generated and you can use this for future logins and operating your account.

Comparison of NPS with other tax-saving investments like PPF, EPF and ELSS

ParametersNPSPPFEPFELSS
Maturity PeriodAfter 60 or 70 years of age15 years, extendable after that for a block of 5 years indefinitelyUpon Retirement3 years
EligibilityFor, investing in National Pension Scheme eligibility criteria is – Any Indian Citizen NPS eligibility age is between the age of 18-70 years, including NRIsInvesting in PPF eligibility criteria is – All Indian Citizens, except NRIsAll Indian employeesAny Indian Citizen
ReturnsReturns depend upon the fund’s performance, as it is a market-linked instrument7.1% (decided by Govt. every quarter)8.50%p.a. (Revised by govt. Every year)Returns depend upon the fund’s performance, as it is a market-linked instrument
Tax BenefitsTax-free upto Rs.2 lakhsTax-free upto Rs.1.5 lakhsThe contribution is tax-deductible. Maturity amount is tax-free only on completion of 5 yearsTax-free up to Rs.1.5 lakhs
Annual ContributionMinimum Rs.500; no maximum limitAny amount between Rs.500 and Rs.1.5 lakhs12% of employee’s basic and DA by employee and employer, eachMinimum Rs.500; no maximum limit
Pre-withdrawal optionsOnly up to 25% of the total amount before retirementPartial withdrawals under specific conditions after completion of 5 or 7 yearsPartial withdrawals, under specific conditions before 5 years subject to TDS deductionCannot withdraw before the lock-in of 3 years

NPS withdrawal rules

In the case of the NPS Tier 1 Account, withdrawal rules are as follows:

A) Not allowed until retirement except in case of certain conditions*

At the age of 60 years,
– Max-60% lump sum withdrawal is allowed and at least 40% annuity needs to be purchased for providing the monthly pension to the subscriber. Also, the investor is allowed to take a 100% Annuity too!

– In case the total corpus is not exceeding Rs. 2 lacs, then the subscriber has the option to withdraw the whole corpus in lump sum

B) In the case of the NPS Tier 2 Accounts, there are no restrictions on withdrawals.

What are the returns offered by NPS?

NPS does not have a fixed interest rate but the returns are market-linked. Money contributed to the NPS account can be invested in up to 4 asset classes – Equities, Corporate Bonds, Government Securities and Alternative Investments through various pension funds. It can range from 8-12%p.a. (average) depending upon the asset allocation selected. The investor gets the benefit of compounding in NPS Tier 1 Account as it has lock-in and is invested for a long term. 

In the case of Tier 2 Accounts, returns depend upon the asset allocation selected and the time period for which the money is invested

FAQs around NPS

1. What if I want to exit from NPS before the age of 60 years (irrespective of cause)? 

At least 80% of the accumulated pension wealth of the subscriber needs to be utilized for the purchase of an annuity providing for the monthly pension of the investor and the balance (20%) is paid as a lump sum payment. If the total corpus is not exceeding Rs. 1 lac, then the investor has the option to withdraw the entire amount in a lump sum.

2. How should I divide my NPS funds between asset classes E, C, G and A?

That depends on your risk appetite. If you are not sure of it, simply select an NPS lifecycle fund. These funds will automatically set your asset allocation according to your age and rebalance it every year.

3. How can I choose a Pension Fund Manager (PFM) in the NPS?

You have to analyse the previous performance of the different pension fund managers. You can get data on this at http://www.npstrust.org.in/return-of-nps-scheme. You can also change your NPS fund manager once in a financial year.

4. What happens in the case of the death of an individual (irrespective of cause)? 

The entire corpus (100%) would be paid to the nominee / legal heir of the investor as NPS death benefit. The nominee, if so wishes, has the option to purchase an annuity of the total corpus. 

5. Can I appoint nominees for the NPS Tier I Account?

Yes, you need to appoint a nominee at the time of opening an NPS account in the prescribed section of the opening form. You can appoint up to 3 nominees for your NPS Tier I account and you have to specify the percentage that you wish to allocate to each nominee summing up to 100%.

Conclusion

Hence the question of investing in National Pension Scheme (NPS) depends on the investor rather than on the scheme itself. As you are the investor, it is always good to look at your savings as well as your future plans, and what is the intention with which you wish to save your money and choose your investment vehicle accordingly. Happy Investing!

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