National Pension Scheme (NPS)

  • Amber Jain
  • Jan 28 2021
  • 10 minutes
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National Pension System (NPS) India is a voluntary long-term investment option ideal for retirement. It comes under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and Central Government. 

Here, we will discuss NPS in detail, along with its objectives, benefits, and other important aspects that every investor must be aware of.

What is NPS?

The National Pension System (NPS) was earlier known as the New Pension Scheme. It is a pension system that is available for investment by all citizens of India. The NPS invests the pool of investment into various market-linked instruments like equity and debt. The final pension amount available depends on the investment performance. The returns made on NPS is in the range of 12% to 14%.

Any Indian citizen between 18-60 years of age can open an NPS account. NPS matures when 

the investor attains 60 years of age, but it can be extended until an individual reaches the age of 70. 

The pension system permits partial withdrawals of up to 25% of total contributions made in the NPS account. This can be done after three years of account opening, but it is permitted only for specific purposes such as home purchase, children’s education, or critical illness.

Reasons to invest in the National Pension System

A sufficient financial corpus creation to meet one’s retirement period is important when it comes to financial planning. This allows individuals to fulfil their financial needs and also to easily sail through post-retirement life with minimal hassles.

To address the financial planning needs of the senior citizen population in the country, the Indian Government introduced the National Pension System or NPS. The scheme is designed to allow systemized savings through an investor’s working years and inculcate a financial discipline among individuals.

Features and benefits of National Pension System

Some of the noteworthy features and benefits of the National Pension System are:

Account opening in the National Pension System is done by a generation of a unique Permanent Retirement Account Number or PRAN for each subscriber. Any fund management activity, including contribution to the scheme, is done via PRAN. The National Pension System allows investors to make systematic investments through either of the below-mentioned two accounts. 

  • Tier-I account
  • Tier-II account

Tier I Account

The Tier-I account acts as a pension account, and withdrawals from this account are subject to specific restrictions. An investor can open this account with a minimum amount of Rs. 500.

This account can avail a tax deduction under Section 80C up to Rs 1.5 lakhs annually and an additional amount of up to Rs 50,000 annually under Section 80CCD (1B). 

This is a non-withdrawable permanent retirement account. At the time of maturity, i.e. once the investor attains the age of 60, 60% of the tax-free corpus can be withdrawn. Additional 40% must mandatorily be used for buying an annuity. As per the announcements made in the Union Budget 2019, the NPS corpus that can be withdrawn at retirement i.e. 60% of the total accumulated corpus is tax exempt from FY 2020-21. This makes NPS come at par with other saving schemes such as PPF and EPF as far as tax treatment is concerned. 

Tier II Account

This retirement-cum-savings account is voluntary and can be opened only if one has a Tier I account. Subscribers can invest or withdraw their funds at any time in this account as per their convenience. The entire corpus can be withdrawn, which is added to the investor’s income and taxed as per the income tax slab applicable. There are no tax benefits on Tier II accounts contributions.

Tier-II accounts are voluntary accounts that offer liquidity of funds via investments and withdrawals. The minimum deposit in this case is Rs. 250.

How to subscribe to NPS?

Investors can subscribe to the National Pensions Scheme through PFRDA-appointed intermediaries using the two accounts mentioned above. These intermediaries can be either of the following: 

  • Trustee banks
  • Custodians
  • CRA or Central Record keeping Agency
  • NPS trust
  • PoP or Points of Presence
  • Annuity Service Providers.

The following two investment options provide flexibility of choice to investors of NPS:

  1. Auto choice

This is the default option available to subscribers. Under this option, investments are managed automatically by an appointed fund manager depending on the investor’s age profile.

  1. Active choice

Under this, individuals can decide on the investment of funds among the available asset classes. They can also allocate different percentages of funds for various  Asset Classes. They are

Class E or Equities. Other asset classes available are 

Class C, i.e., Corporate Debt Securities 

Class G or Government Securities and 

Class A or Alternative Investment Fund that invests in alternative instruments like Real Estate Investment Trust, etc

Under active choice an investor can allocate a maximum of 75% of their funds to Class E or equities. On turning 50, the investment towards equities goes down by 2.5% every year so that it drops to 50%. Also, investors can allocate only a maximum of 5% towards Class A.

Subscribers also have an option to shuffle their investment options or change their fund manager. These are, however, subject to certain constraints.

Partial withdrawal from NPS

NPS includes an option to make a partial withdrawal of contributions. It allows individuals to partially access their funds accumulated over the years. This helps them in meeting their financial needs before retirement and in case of any emergencies.

A subscriber can make partial withdrawals of their Tier I scheme contribution of up to 25%. To seek partial withdrawal, contributions should be made for at least 10 years. There should also be a minimum gap of 5 years between two consecutive partial withdrawals.

Tax benefits of NPS

Income tax benefits for National Pension Scheme investments are available under the following sections:

Applicable Sections under the Income Tax Act 1961Tax Benefits Allowed
U/S 80CCD (1)Contribution made by self towards Tier I investments are tax-deductible with a cap of Rs.1.5 lakhs u/s 80C.
U/S 80CCD 1(B)Apart from deductions under section 80CCD (1), subscribers can claim up to Rs. 50,000 as deductions towards Tier I contributions.
U/S 80CCD (2)Contribution made by an employer towards Tier I investments is eligible for deduction of up to 14% for central government contributions and max 10% for others. This deduction is apart from the deduction limit applicable u/s 80C.

Additional tax benefits on NPS Tier I investments are – 

  • Up to 25% of Tier I contribution withdrawals are exempt from tax.
  • Annuity purchase made from the National Pension Scheme corpus is entirely tax exempt. Any income generated from such annuity is taxable in the following years.
  • Lump-sum withdrawal is tax exempt upto 60% of the NPS corpus after a subscriber turns 60 years of age.

After attaining 60 years of age, if the total NPS corpus amounts to Rs. 20 lakhs, a lump sum withdrawal of 60%, i.e., maximum Rs. 12 lakhs, is tax exempt. Additionally, the remaining 40% of the corpus used for annuity purchase is tax exempt. The condition here is that the income generated from such annuity is taxable.

Who should invest in the NPS?

NPS is a good investment option for anyone who is looking to plan for their retirement and has a low-risk appetite. Regular earnings through pension during retirement years is definitely a boon, especially for individuals who retire from private-sector jobs.

This systematic investment choice can make a huge difference to post-retirement life of an individual. Salaried individuals who want to make the most of the 80C deductions can consider investing in this scheme.

How to open an NPS account

PFRDA is responsible for the operations of NPS and it offers both online and offline modes of opening an NPS account. Here are the processes for each:

Offline process

To open an NPS account offline, one must look for a PoP–Point of Presence. An applicant will need a subscriber form from the nearest PoP, which has to be submitted along with the KYC documents. 

Once the initial investment is made (not less than Rs.500 or Rs.250 monthly or Rs. 1,000 annually), the PoP will share a PRAN–Permanent Retirement Account Number.

The PRAN and the password provided in a sealed welcome kit will help in operating the account. There is also a onetime registration fee of Rs.125 involved.

Online process

One can open an NPS account in less than half an hour through the online mode. Opening an account online (enps.nsdl.com) is easy, if one links the account to PAN, Aadhaar and mobile number.

An applicant can validate the registration using the OTP sent to the registered mobile. This will generate a PRAN (Permanent Retirement Account Number), which can be used for NPS login.

Latest announcements on NPS investment

A subscriber can now withdraw up to Rs. 5 lakhs from the permanent retirement account without buying an annuity, provided the accumulated pension wealth in the Permanent Retirement Account is equal to or less than Rs. 5 lakhs. Once this option is exercised, the subscriber’s right to receive any pension from NPS extinguishes. 

Subscribers can also continue to make contributions to an NPS account beyond 60 years of age, only upto 70 years of age. This option must be claimed at least 15 days prior to attaining 60 years of age. 

The partial withdrawal process has now been made simple for NPS subscribers. Partial withdrawal can be made based on self-declaration instead of the earlier requirement of submitting supporting documents to substantiate the reason for partial withdrawal. 

Conclusion

Consider investing in the NPS scheme if the benefits match your risk profile and investment objective. Before investing, one must be clear about the expected returns from NPS vis-à-vis personal financial goals. This will help in fetching maximum benefits from the investment.

FAQs

  1. How much pension can I get from NPS?

The actual pension from NPS depends on the corpus size and the ongoing annuity rates. For instance, if your corpus is Rs. 1 crore and the ongoing annuity rate is 8%, you can get an annual pension of Rs. 8 lakhs. This means a monthly pension of Rs. 66,666.

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

To choose a PFM for NPS, you must analyse the previous performance of the different pension fund managers. This data is available on link – http://www.npstrust.org.in/return-of-nps-scheme. It is possible to change an NPS fund manager once in a financial year.

  1. Can NRIs open an NPS Account?

Yes, NRIs can open an NPS account, but they have to be Indian citizens

  1. Can I invest in both NPS and APY?

Yes, it is possible to invest in both NPS and APY. 

  1. Who receives the NPS benefits in case of death of the investor before turning 60?

The nominee receives the entire accumulated pension corpus in case of the investor’s death before 60 years. If the subscriber has not furnished a nominee name, the corpus will go to the legal heir of the subscriber. 

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