NPS or National Pension System is a pension cum investment scheme launched by Government of India in January 2004 for government employees. But, later The Government decided to roll out the NPS for all citizens from 01 May 2009.
In this article, we will discuss the fundamental aspects of NPS.
What is NPS?
National Pension System provides old age income with reasonable market-based returns. So it is a perfect solution for retirement planning. This scheme encourages people to invest regularly in a pension account during their working life.
Pension Fund Regulatory and Development Authority (PFRDA) is the main regulatory body of NPS. They appointed NSDL as Central Recordkeeping Agency (CRA) for this scheme.
CRA issue a Permanent Retirement Account Number (PRAN) to each subscriber of NPS and maintain all the functions of record keeping, administration, transactions, and Customer Service for each subscriber.
Before, the NPS was available only for the Central Government employees. However, the PFRDA has made it open to all Indian citizens on a voluntary basis. Moreover, this is very effective for anyone who works in the private sector and requires a regular pension after their retirement.
Above all this scheme is portable across jobs and locations. Most importantly, NPS has tax benefits under Section 80C and Section 80CCD.
What is the Eligibility to Join NPS?
A systematic investment scheme like NPS can make a massive difference to your life after retirement. Moreover, the salaried people who need 80C tax deductions can also consider this investment scheme.
Any citizen of India, whether resident or non-resident can join NPS. But they must follow these conditions:
- As on the offline or online date of submission of NPS application, Subscriber must have age between 18 – 65 years.
- The subscriber has to comply with the Know Your Customer (KYC) norms according to the Subscriber Registration Form.
NPS has two types of accounts – Tier I and Tier II. The Tier-I account is mandatory for subscribers and Tier II is the voluntary investment.
Let discuss the contribution of these two types of accounts in a comparative manner.
|#||Features||NPS Tier-I Account||NPS Tier-II Account|
|2||Eligibility||Any Indian Citizen (Resident or NRI)||Only subscriber of Tier-I|
|3||Withdrawals||You cannot withdraw entire money before retirement and after retirement there is restrictions on withdrawal from Tier-I account.||Subscriber is free to withdraw the entire money from Tier-II account.|
|4||Minimum contribution at account opening||Rs 500||Rs 1,000|
|5||Minimum NPS contribution||Rs 500 or Rs 1,000 p.a.||Rs 250|
|6||Maximum NPS contribution||No limit||No limit|
|7||Minimum frequency of contribution||1 per year||1 per year|
|8||Investment Charges||Annual maintenance charges (If NPS through employer then it will payable for employer)||Activation charge and transaction charges (payable by subscriber)|
|9||Fund Transfer||You cannot transfer fund from Tier I to Tier II.||Fund transfer from Tier II to Tier I is allowed.|
|10||Tax Exemptions||Tax deduction allowed under Section 80C up to Rs 1.5 lakh per annum and under Section 80CCD (1B) up to Rs 50,000 per annum.||No tax deductions|
Moreover, central government employees have to contribute 10% of their basic salary in NPS. For private sector employee and self-employed citizen, this is a voluntary investment.
On 10th December 2018, finance minister Arun Jaitley announced that NPS Tier II would be eligible for tax deduction under Section 80C for three years lock-in period.
What are the Benefits of NPS?
1. Interest Rate
The NPS offers multiple investment options to its subscribers. It also allows choosing a pension fund manager. Moreover, then you can switch their investment options and fund managers during the tenure of the scheme under regulatory restrictions.
Therefore, the returns are based entirely on market rates. This scheme is useful for decades and has produced 8% to 10% annualized gains as per the plan is chosen. Is not great?
This scheme is very simple to operate. After opening an account with NPS, the subscriber gets a unique Permanent Retirement Account Number (PRAN) for a lifetime.
To make it simple, NPS is structured into two tiers:
a. Tier-I account:
The Tire-I account is a non-withdrawable permanent retirement account. So, in this scheme fund manager invest accumulated capital as per your option.
b. Tier-II account:
The Tire-II account is a voluntary withdrawable account. You must have an active Tier-I account before opening a Tier-II account. Moreover, you are allowed for withdrawals from this account as per the needs.
3. Tax efficiency
Most importantly, NPS provide tax efficiency in the following cases.
- Deduction of up to Rs. 1.5 lakhs to be claimed under NPS for your contribution and contribution of the employer.
- Section 80CCD (1) covers the self-contribution, which is a part of Section 80C.
- The maximum deduction you can claim under 80CCD (1) of the Income Tax Act is 10% of the salary (basic plus DA).
- The employer’s contribution to NPS is exempted under Section 80CCD (2) of the Income Tax Act. But, this benefit is not available for self-employed taxpayers.
- Moreover, an individual taxpayer can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B). This is in addition to Rs 1.5 lakh permitted under Section 80 of the Income Tax Act.
This is a flexible investment plan. You can switch from one investment option to another or from one fund manager to another easily under NPS regulations. Therefore, you are allowed to change the pension scheme or the fund manager if you are not happy with their performance.
If you change to a new job or location, then it provides a seamless and hassle-free arrangement for its existing subscriber. With the help of Permanent Retirement Account Number (PRAN), you can operate from anywhere.
6. Equity Allocation
Most importantly, it offers a wide range of investment options and the choice of Pension Funds (PFs). Scheme E of the NPS invests in equity. You may allocate a maximum 50% of your investment to equities. Therefore, this stabilizes the risk-return equation
So, there are two types of investment options –
Allocate your investment portfolio as per age. Therefore, an older citizen portfolio consists of more stable and less risky investment options.
Now, the active equity allocation let you decide the scheme and allow to split investments.
Above all, the earning potential is higher as compared to other fixed income schemes. The PFRDA has proposed to increase the cap on equity exposure to 75% in NPS to extend old age security coverage to all citizens.
The Pension Fund Regulatory and Development Authority (PFRDA) regulates NPS. PFRDA provides transparent investment regulations, regular monitoring, and efficient fund managers for all the subscribers.
8. Low Cost
The account maintenance charges are very low compared to other pension schemes. Consequently, a retirement plan is a matter of long term investment, like 30-40 years. Therefore, the investment charge claimed by these companies is very significant for you. So, in that case, NPS is a wise selection.
9. Power of Compounding
In NPS you regular accumulated pension wealth grows with a compounding effect up to the retirement. So, you can easily understand that with a low maintenance charge and power of compounding the benefit of your heard earned accumulated wealth will be huge financial support after retirement. As well as provide an old age income.
10. Helpful Withdrawal and Exit rules
Meanwhile, NPS is a pension scheme. So, it is necessary to continue funding until the age of 60. However, funding for at least 3 years you can withdraw up to 25% from NPS. This withdrawal is allowed for certain purposes, like any medical emergency, child education, building, buying a house etc.
In addition, you can make withdrawal up to 3 times with a gap of 5 years in the entire tenure. But, these restrictions are only imposed on tier I accounts and not on tier II accounts.
Pension Fund Regulatory and Development Authority (PFRDA) operate NPS. PFRDA appointed NSDL as Central Recordkeeping Agency (CRA) for this scheme. They offer both offline and online method to open the NPS account.
Firstly, if you want to open an NPS account offline or manually, find a POP or Point of Presence near your location. POP could be a bank too. Then, collect an NPS subscriber form from nearest POP and submit with required KYC documents.
So, after making the initial payment (Minimum Rs. 500), the POP will send you a unique Retirement Account Number (PRAN). They will provide you a sealed welcome kit that will help you operate your NPS account.
Opening an online NPS account is really very easy. You can open NPS account online by visiting eNPS website.
For Account opening, you need the followings.
- A mobile number
- An email ID
- An active bank account with an enabled net banking facility
- Your PAN or Aadhaar card
- Scan photograph and signature
So, you can open eNPS account using PAN or Aadhaar card. Your mobile number will require for OTP verification. Therefore, in this way, it will generate a PRAN that you can use for further NPS login.
How NPS works?
- After a successful account opening, a Permanent Retirement Account Number (PRAN) is given to the subscriber.
- So, right after PRAN generation, an email alert and an SMS alert is sent to the registered email ID and mobile number by NSDL-CRA (Central Record Keeping Agency).
- Meanwhile, subscriber starts their contribution regularly during the working life to create the corpus for retirement.
- Therefore, after retirement or at the time of exit from the scheme, the Corpus becomes available to the subscriber as per PFRDA rules and regulation.
Moreover, according to the regulations, some portion of the Corpus must be invested in Annuity to provide a monthly pension after retirement or exit from the scheme.
In conclusion, you can start investing in NPS if the benefits described above match your risk appetite and financial goal.
However, there are lots of investment options available in the market. So, you can accumulate much more money with more flexibility by investing in Equity Mutual Funds, ELSS, PPF, EPF etc. Even you can go for direct stock market investment.
Certainly, it is never too late to invest. But, try to start investing from an early age.