What is NPS?
National Pension Scheme (NPS) is a Central Government initiative; a voluntary and long-term investment plan specially designed for the purpose of building a retirement corpus. The scheme is open to employees from the public, private, and even the unorganized sectors except those from the armed forces.
It comes under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government.
In India, investment for retirement is highly ignored by many people. The purpose of NPS is to encourage people to invest in their retirement.
How to open an NPS Account?
Investors can open the NPS account in two ways,
- By visiting the POP-SP (Point of Presence service provider) which could be a bank branch or post office.
- Online through the eNPS website using PAN and bank details.
Type of Accounts: There are two types of NPS accounts – Tier-I & Tier-II.
|Tax Exemption||Up to Rs 2 lakh p.a.
(Under 80C of Rs. 1.50 Lacs and Rs. 0.50 Lacs under 80CCD)
|Rs. 1.50 Lacs for Government Employees
For others – No exemption
Who can invest in NPS?
There are two conditions to fulfill in order to open the NPS Account. The first condition is that the person should be a citizen of India, whether resident or non-resident. The age of the Applicant should be between 18 – 70 years of age as of the date of submission and should comply with KYC norms as prescribed.
Minimum Investment Amount:
An investor is required to make an initial contribution (a minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration.
Features & Benefits of NPS:
1. Choice of Active Investment & Auto Investment
An investor has two choices; the first one is Active Investment and the second is Auto Investment
Active Investment Choice:
An investor has the choice to actively decide the amount to be invested. He has to decide the Asset Class as well as the percentage allocation in each asset class to be done. There are four Asset Classes (Equity, Corporate debt, Government Bonds, and Alternative Investment Funds).
As per guidelines & rules following are the four choices for the investors.
- Asset class E – Equity and related instruments
- Asset class C – Corporate debt and related instruments
- Asset class G – Government Bonds and related instruments
- Asset Class A – Alternative Investment Funds including instruments like CMBS, MBS, REITS, AIFs, etc.
Investors can select multiple Asset Classes as mentioned below. However, there are some restrictions w.r.t the age of the investor as mentioned below,
- Up to 50 years of age: The maximum permitted Equity Investment is 75% of the total asset allocation.
- From 51 years and above: The maximum permitted Equity Investment will be as per the equity allocation matrix provided.
- Alternative Investment Funds: The percentage (%) contribution value cannot exceed 5%.
- The total asset allocation across E, C, G, and, A asset classes must be equal to 100%
Active Investment choice is well suited for pro investors; for those investors who understand the asset classes and risk associated with the same.
If not, NPS offers the Auto Choice option which is comparatively easy. In this option the Asset Allocation is pre-defined. The funds get invested across three asset classes as per the age of the investor. The Equity & Corporate Debt exposure tends to decrease automatically with the increase in age of an investor and exposure to Government Bonds and related instruments tend to increase. As per the risk appetite of an investor, there are three different options, available under ‘Auto Choice’ – Aggressive, Moderate, and Conservative.
- Aggressive Choice: The maximum permitted Equity Investment is 75% of the total asset allocation.
- Moderate Choice: The maximum permitted Equity Investment is 50% of the total asset allocation.
- Conservative Choice: The maximum permitted Equity Investment is 25% of the total asset allocation.
To know more about Equity Allocation Matrix in Active & Auto Choice Investment:
2. NPS Withdrawal rules:
Since the purpose of NPS investment is to have a pension/regular income at the time of retirement, investors should continue this investment till 60. Having said that, investors after investing in the scheme for at least 3 years, investors can withdraw up to 25% of the amount for certain purposes such as children’s marriage, higher studies, purchasing a home, medical treatment, etc. Investors can make withdrawals up to 3 times (with a gap of 5 years) in the entire tenure. You can check FAQ/s on the official website for the latest updates.
At the time of maturity @ 60, investors should compulsorily be required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm. That means investors can make a lump sum withdrawal of 60%. This lump sum of 60% of the money is completely tax-free. However, pension is taxable in the hands of investors.
3. Tax Efficient:
NPS investment Tax-Efficient as well. An investor gets tax exemption in Income Tax. The maximum amount eligible for deduction will be the lowest of the below,
- 10% of Basic Salary + Dearness Allowance (DA)
- Actual NPS contribution made by the employer
- Gross Total Income
An investor can claim a maximum of Rs. 50,000 per annum as NPS tax deductions under section 80 CCD(1B). This is over and above Section 80C deductions that are presently Rs. 1,50,000. Hence, the total deduction of 80C & 80CCD (1B) would be Rs. 2,00,000/-
4. Choosing a good Pension Fund Manager (PFM):
In NPS, an Investor is required to choose the Pension Fund Manager (PFM) while registering the CRA system NPS. An investor has different options to choose a good Fund Manager.
There are multiple PFMs, Investment options (Auto or Active), and four Asset Classes i.e. Equity, Corporate debt, Government Bonds, and Alternative Investment Funds. The investor first selects the PFM, and post selection of PFM, he has an option to select any one of the Investment Options.
Below is the list of Pension Fund Managers (PFM) under NPS:
- Birla Sunlife Pension Management Limited
- HDFC Pension Management Company Limited
- ICICI Prudential Pension Funds Management Company Limited
- Kotak Mahindra Pension Fund Limited
- LIC Pension Fund Limited 6. Reliance Capital Pension Fund Limited
- SBI Pension Funds Private Limited
- UTI Retirement Solutions Limited
The Pension Fund Manager, as per your selection manages your investment.
5. Returns Expectancy:
Though a small portion, some investment amount goes to Equity Asset Class. Considering the long investment tenure NPS is expected to deliver higher returns than other tax-saving traditional investments such as Kisan Vikas Patra (KVP), National Saving Certificate (NSC), or Public Provident Fund (PPF).
So far, the NPS scheme has delivered 8%-10% annualized returns over a decade.
I hope you find the blog helpful. Before ending this blog, let’s see one of the practical examples,
|Monthly Investment||Rs. 10,000/-|
|Expected Returns||9% p.a.|
|Pension/Annuity (%)||40% (as per the rule)|
|Expected Returns of Pension /Annuity||6% p.a.|
|Total Investment Amount||Rs. 36,00,000/-|
|Pension Corpus Accumulated||Rs. 1,84,44,740/-|
|Lump sum Amount||Rs. 1,10,66,844/-|
|Monthly Pension||Rs. 36,889/-|