NATIONAL PENSION SYSTEM (NPS)

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NATIONAL PENSION SYSTEM (NPS)

  • Social security initiative by Central Govt. and is open to all except armed forces
  • Regulated by PFDRA, review by NPS trust.
  • Minimum investment of INR 6000/- per year in lumpsum or in installments of INR 500/- per month.
  • All the contribution is invested in the market related instruments i.e. equity, debt or in Govt. securities.
  • It provides a PRAN (Permanent Retirement Account Number) and is structured into 3 accounts Tier 1, Tier 2 and Tier 2 tax saver.
  • Tier 1 account is non-withdrawal and maturity period is retirement.
  • Tier 2 account is voluntary withdrawal account as per needs of the subscriber.
  • Tier 2 tax saver has lock in period of 3 years.
  • Much higher returns than PPF or EPF/VPF.
  • It connects the risk with age if you do not select the risk level.
  • Tax benefits under section 80 C and section 80 CCD for tier 1 account.
  • 25% of the amount can be withdrawn if investing more than 3 years for certain purpose.
  • 60% of total amount (tax free) can we withdrawn from tier 1 account post retirement and rest
  • will be as monthly pension.
  • Market related risks.

OPENING NPS ACCOUNT

  • Any Indian citizen can open except Armed Forces.
  • Minimum age to open the account is 18 years and maximum age is 65 years.
  • Account can be opened online by logging on to the NPS website
  • On account opening, PRAN (Permanent Retirement Account Number) is assigned using which you can login and use online services.
  • In order to know the process of online account opening, please visit the following link: Registration_using_PAN.PDF (nsdl.co.in)

BENEFITS OF NPS SCHEME

  • Invests in the market related instruments, long term ROI – 15% (approx.)
  • Tax benefit under Section 80C up to INR 1.5 lakhs and under Section 80CCD(1B) up to INR 50,000/-.
  • Compounding effect.
  • Its Auto mode automatically reduces your exposure to the risky market instruments according to your age.
  • You can set your exposure manually to the equity and debt instruments based on your risk appetite.
  • No maximum limit. All the amount after the retirement will be tax free.
  • Using PRAN, you can log in and use the online services by NPS trust.
  • You can withdraw 25% of the fund for specific reasons such as buying a house, marriage, medical treatment, higher education etc. only after completing 3 years of continuous contribution.

TYPES OF NPS ACCOUNT

NPS scheme offers 3 types of account:

  1. Tier 1
  2. Tier 2
  3. Tier 2 Tax Saver

Tier 1 Account:

  1. Main wealth creation account with limitations on withdrawal.
  2. Account can be opened with INR 500/-.
  3. Any citizen between 18 to 65 can open Tier 1 account.
  4. Only 25% of the contribution can be withdrawn before retirement due to some reasons.
  5. Only 60% of the total amount in Tier 1 account can be withdrawn after retirement.
  6. Rest 40% can be used to buy annuity from a life insurer.
  7. Tax Free Retirement Fund and Pension from annuity.
  8. Tax benefit under Section 80C and Section 80CCD(1B).
  9. Contribution in this account is invested in the market related instruments.

Tier 2 Account:

  1. Tier 2 account can be opened only if you have Tier 1 account.
  2. like a normal savings account in which you can deposit or withdraw any time.
  3. No tax benefits.
  4. No mandatory contribution is required every year.
  5. Account can be opened for minimum registration of INR 1000/-.
  6. Contribution in this account is invested in the market related instruments.
  7. Any returns earned in this account is taxable as per the tax slab one falls in.

Tier 2 Tax Saver Account:

  1. Tier 2 Tax saver account have a lock in period of 3 years.
  2. Each investment will be calculated separately for 3 years lock in period.
  3. It is only meant for central Govt. employees.
  4. Subscribers can choose the fund manager as per their choice but are not allowed to choose Asset classes.
  5. This scheme can benefit conservative investors as the equity exposure is between 10-25%, 10-90% in debt and up to 5% in cash/MFs or money market.
  6. Tax benefit for investments up to 1.5 Lakhs per annum under section 80C.
  7. Account can be opened for minimum registration of INR 1000/-.
  8. Premature withdrawal not allowed. Corpus can be withdrawn by legal heir on death.

TYPES OF FUNDS:

There are 4 asset classes of funds in NPS, the contribution in each can be either auto or manual:

  1. Scheme E: Asset class E, invests in equity instruments.
  2. Scheme G: Asset class G, invests in fixed income instruments issued by Govt.
  3. Scheme C: Asset class C, Invests in fixed income instruments by private organizations and
    companies.
  4. Scheme A: Asset class A, invests in alternative investment funds like AIFs, REITs etc

FUND MANAGERS (MARKET RELATED)

There are currently 10 NPS Fund Managers, who manages the investments for the NPS subscribers:

  1. HDFC
  2. LIC
  3. UTI
  4. ICICI Prudential
  5. SBI
  6. Aditya Birla Sun Life
  7. Kotak Mahindra
  8. Axis Asset Management
  9. Tata Asset Management
  10. Max Life Insurance

NPS CHOICE OF AUTO AND MANUAL FOR FUNDS

NPS allows to invest in the 4 types of asset classes in 2 ways:

  1. Auto Choice
  2. Active Choice

Auto Choice:

This choice is for those who do not have the required knowledge to manage their funds. There are
again 3 choices and the individual can select any one of these based on the risk-reward ratio:

  1. a. Aggressive Life Cycle Fund
  2. b. Moderate Life Cycle Fund
  3. c. Conservative Life Cycle Fund

Aggressive Life Cycle Fund:

  1. This choice is for the investors who want high exposure to the Asset Class E. (High Risk –High Reward).
  2. Max. exposure to equity can be 75% of your total fund and it decreases as your age increases above 35.
  3. As soon as you turn 55, your exposure to equity turns down to 15% and it will remain same till the retirement.

Moderate Life Cycle Fund:

  1. This choice is for the investors who neither want the high exposure nor the low exposure to the Asset Class E. (Medium Risk – Medium Reward).
  2. Max. exposure to equity can be 50% of your total fund and it decreases as your age increases above 35.
  3. As soon as you turn 55, your exposure to equity turns down to 10% and it will remain same till the retirement.

Conservative Life Cycle Fund:

  1. This choice is for the investors who want least exposure to the Asset Class E. (Low Risk – Low Reward).
  2. Max. exposure to equity can be 25% of your total fund and it decreases as your age increases above 35.
  3. As soon as you turn 55, your exposure to equity turns down to 5% and it will remain same till the retirement.

The exposure to the asset class is automatically rebalanced once in a year according to your
age. The NPS subscribers in auto choice do not to perform any asset allocation, it is done
automatically.

Active Choice:

  • This choice is for the intelligent investors who want to allocate their fund to different asset classes according to their will.
  • Under this max. exposure to Asset Class E can be 75% of your total fund.
  • When the NPS subscriber reaches to the age of 50, the exposure to the Asset Class E get turn down to 2.5% every year. So, it will reach to 50% by the age of 60.

CHANGE IN SCHEME PREFERENCE:

  • If any subscriber wants to change the choice from Auto to Active or vice versa, it can be
    done 4 times in a financial year.
  • If any Active choice subscriber want to change the Asset class scheme preference, then it
    can be done 4 times in a financial year. It is processed in “T+4” days.
  • If you want to change the fund manager, then it can be done once in a financial year.

TAXES & INTEREST

  • Interest not applicable. Since, contribution is invested in market so expect annualized returns from 10% - 15%.
  • Retirement corpus and the returns will be tax free.
  • Pension on buying annuity after retirement will be tax free.
  • Tax benefit under Section 80C up to INR 1.5 Lakhs per annum and under Section 80CCD(1B) up to INR 50,000/- per annum.
  • There is no tax applicable on the voluntary contributions made in the NPS tier 1 account.
  • Also, there is no maximum limit to the voluntary contributions made in the NPS tier 1 account.

WITHDRAWAL

  • On retirement, 60% of the fund can be withdrawn lumpsum for the rest 40% annuity scheme should be taken for the monthly pensions.
  • On retirement, if the accumulated pension corpus is less than or equal to 5 lakhs then it can be withdrawn 100%.
  • Before retirement, subscribers can withdraw up to 25% of the total contribution made.
  • Before retirement, withdrawal can be made in specific circumstances like education, buying a house or in case of medical emergency.
  • Before retirement, subscribers can make withdrawal up to 3 times in the interval of 5 years in the entire tenure.
  • Before retirement, one can exit from NPS only after completion of 10 years.
  • On premature exit, at least 80% of the accumulated pension corpus should be utilized to purchase annuity for a regular monthly pension.
  • On premature exit, it the total fund is less than or equal to 2.5 lakhs, then it can be withdrawn 100%.

Calculate your NPS Returns:

https://www.npstrust.org.in/content/pension-calculator

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