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What is NPS (National Pension Scheme)?

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National Pension Scheme (NPS), a defined contribution scheme, addresses the need for greater participation in pension plans/retirement savings. It was initially launched by the Government of India as a defined contribution scheme for central government employees excluding the armed forces.

The NPS was made available for individuals from the private sector as well beginning 1st May 2009. This means any citizen of India can participate in the National Pension Scheme.

The NPS facilitates accumulation of savings over the individual’s working years. At retirement, he can purchase a pension/annuity with the accumulated savings in the NPS account.

Some of the basic features of the New Pension Scheme include:

  1. NPS is regulated by the Pension Funds Regulatory and Development Authority – PFRDA
  2. Any citizen of India in the age bracket of 18 – 60 years can participate in the NPS
  3. Minimum annual contribution towards the NPS is Rs 6,000; there is no limit on number of transactions
  4. The minimum transaction amount is Rs 500
  5. The individual can invest in different asset classes through 6 fund managers
  6. The NPS is a low-cost investment, with fund management charge of just 0.0009%

How to Invest in NPS

A Guide to Investing in NPS

To subscribe to the NPS, an individual needs to open an account at a Point of Presence or POP. Most public and private sector banks and several financial institutions are listed as POPs. Certain Point of Presence Service Providers (POP-SPs) are also authorised collection points where individuals can open accounts. The full list of POPs and their corresponding locations can be found on the Pension Fund Regulatory and Development Authority’s (PFRDA’s) website. In order to enrol in the NPS scheme, investors will need to submit the following documents at the POP:

  • Address Proof (Passport, Ration Card with photograph, Aadhaar Card, Bank Passbook, Electricity Bill, Water Bill, etc.)
  • Identity Proof (Passport, Ration Card with photograph, Aadhaar Card, PAN Card, Job Card issued by NEGRA, etc.)

Making Contributions

Individuals can contribute to the NPS either directly or through their employer. Direct contributions can be made online through the eNPS or via cash or cheque. On the other hand, for contributions that are routed through the employer, subscribers will need to get in touch with their HR or Compensation and Benefits (C&B) team.

Minimum Contribution Required

For Tier I Accounts:

An annual contribution of at least INR 6,000 needs to be made to keep the NPS account active. Every time a contribution is made to the NPS, it should be at least INR 500. There is no upper limit on the number of contributions that can be made in a single year.

For Tier II Accounts:

An annual contribution of at least INR 2,500 needs to be made to keep the Tier II account active. The minimum amount that can be contributed at any given time is INR 250. Similar to the Tier I account, there’s no upper limit on the number of contributions that can be made.

Features and Benefits of NPS

The NPS has become a popular investment and savings tool due to its customer-friendly features and numerous benefits, such as:

1. Flexibility:

Firstly, the NPS is a voluntary scheme, so individuals have the option of choosing whether they want to put their money into the investment tool or not. Secondly, while Tier I accounts only allow withdrawals in very limited circumstances, investors who open Tier II accounts have the option of withdrawing their money as and when they require it.

2. Portability:

Since the NPS is linked to your Permanent Retirement Account Number (PRAN), it has become increasingly easy for individuals to port their NPS, even under employer schemes, from one job to the next.

3. Guaranteed Pension:

One of the biggest benefits of the NPS is the fact that it provides individuals with a safe instrument through which they can make investments for their future. The money that is put into NPS accounts is invested in Government-regulated annuity instruments, providing investors with peace of mind.

4. Tax Savings:

Contributions that are made to the NPS, up to 10% of anindividual’s salary, is exempt from tax under Section 80CCD of the Income Tax Act, 1961. Additionally, the amount withdrawn from the NPS, up to 40% of the accumulated corpus, as well as the amount invested in annuity schemes is also exempt from taxation.

Types of NPS

There are two types of NPS accounts that an individual can choose from:

1. Tier I – This account is opened by every individual when they subscribe to the NPS. Typically speaking, withdrawals cannot be made from this account before the investor reaches the age of 60. In certain cases, however, partial withdrawals can be allowed from the account in case of a critical illness, for the investor’s children’s education, for wedding expenses, or to purchase or construct a home. It’s important to note that the maximum partial withdrawal allowed is only 25% of the collected corpus.

 

2. Tier II – This functions more like a savings account and there is no restriction on the number of withdrawals that can be made. The opening of these accounts are completely voluntary, and investors can choose to open it at any time, as long as they already have an active Tier I account. Investors can request to withdraw money from this account online by using the login ID and password that has been provided to them by the Central Recordkeeping Agency (CRA).

Asset profile options

The PFRDA selects fund managers to invest the money contributed by individuals towards their NPS accounts. Fund managers must manage the money in 3 separate accounts having separate asset profiles viz. Equity (E), Corporate bonds (C) and G Government securities (G). 

Investors can choose from one of the two options:

  1. Active choice: Here the investor has the choice to invest in E-C-G so long as the allocation to Equity or E does not exceed 50%
  2. Auto choice: Here the investor delegates the asset allocation to a lifecycle fund which has a predefined portfolio combination based on age

Taxation

Contributions made to the NPS by the investor are eligible for deductions underincome tax deduction under Section 80CCD. This is upto Rs1,50,000 under section 80 CDD(1) and an additional Rs 50,000 under section 80CCD (1B)

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