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  • Writer's pictureSahastha

NPS : Secure golden years with National Pension System

Updated: Oct 4, 2023

The National Pension System (NPS), launched by the government of India for its citizens to bring an attractive long term savings avenue to effectively plan for your retirement through safe and reasonable market based returns. The NPS is a voluntary retirement scheme through which you can create a retirement corpus or your old-age pension. NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and available to all Indian citizens (resident or non-resident) between 18 to 65 years old.

In many ways, opening an NPS account is similar to opening of any investment account, but it’s a lot simpler. PFRDA has appointed various banking and non banking financial institutes as ‘Point of Presence’ (POP) for assisting you to enroll for NPS. There are two different types of accounts under NPS:-

Tier I (Pension account) – Tier I account under NPS is your pension account where you contribute to build your retirement corpus. Start investing in Tier I account with at least Rs. 500. Minimum contribution in Tier I account is Rs. 6000 per financial year. This is the minimum amount you will be required to hold annually. Over and above this mandate limit, you can contribute any amount at any frequency as per your convenience. You are permitted to withdraw under Tier I but you can make withdrawals only at the end of 10th year. That is your money will have to be locked up for a minimum period of 10 years. However, you can withdraw only 25% of the capital. Withdrawal is allowed maximum three times during the entire tenure of subscription with a gap of at least five years between two partial withdrawals. When you reach the maturity age, which is 60 years, you’ll have to use at least 40 per cent of your accumulated pension wealth to purchase an annuity that provides you with a monthly pension. The remaining corpus is given to you as a lump sum. You have the option to allow the lump sum to remain invested and collect it anytime till the age of 70 years. When you want to exit NPS before the age of 60 years, you’ll have to use at least 80 per cent of your accumulated pension wealth to purchase an annuity that provides you with a monthly pension. The remaining corpus is given to you as a lump sum.

Tier II (Investment account) – Tier II is an add-on account, which is simply a voluntary savings/ investment facility. During activation of Tier II account, you need to pay the initial contribution of only Rs. 1000. After that, you can start investing money, starting from a minimum of Rs. 250. Tier II gives you the flexibility to invest anytime through any POP. It also offers you liquidity by allowing you to withdraw your entire investment at any given point of time. An active Tier I is mandatory to open a Tier II account.

Choose an investment option

An NPS subscriber is required to choose the Pension Fund Manager (PFM) as well as scheme preference while registering in CRA system under NPS. The Subscriber has been provided with several options to choose from.

In NPS, there are multiple PFMs, Investment options (Auto or Active) and three asset classes i.e. Equity, Corporate debt, Government Bonds. The Subscriber first selects the PFM, and post selection of PFM, subscriber has an option to select any one of the Investment Options.

Pension Fund Manager (PFM) under NPS:

Subscriber is mandatorily required to choose one PFM from the available PFMs.

  1. Birla Sunlife Pension Management Limited

  2. HDFC Pension Management Company Limited

  3. ICICI Prudential Pension Funds Management Company Limited

  4. Kotak Mahindra Pension Fund Limited

  5. LIC Pension Fund Limited

  6. Reliance Capital Pension Fund Limited

  7. SBI Pension Funds Private Limited

  8. UTI Retirement Solutions Limited

Active choice: Individual funds

Unlike traditional rigid retirement investment products, NPS offers you with the flexibility to design your own portfolio. Depending on your risk appetite, you can design your portfolio by allocating your funds among the following three asset classes:-

  1. Equity (Asset E) – A ‘high risk-high return’ fund that invests predominantly in equity market instruments.

  2. Corporate debt (Asset C) – A ‘medium return-medium risk’ fund that invests predominantly in fixed income bearing instruments.

  3. Government securities (Asset G) – A ‘low return-low risk’ fund that invests purely in fixed income instruments.

If you’re a conservative investor, you can choose to invest your entire pension wealth in the last two asset classes. However, if you want to have exposure to equity, you can allocate up to 50 per cent of investment to the first asset class.

Auto choice: Lifecycle fund

NPS offers an easy option for those subscribers who do not have the required knowledge to manage their NPS investments. In this option, the investments will be made in a life-cycle fund. Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per age of subscriber). When you’re younger, a larger share will be in the higher risk-higher return option, as you approach retirement, the proportion in the lower risk-lower return option becomes maximum. The matrix for life-cycle fund is given below

AgeAsset EAsset CAsset GUp to 35 years50%30 %20%36 years48%29%23%37 years46%28%26%38 years44%27%29%39 years42%26%32%40 years40%25%35%41 years38%24%38%42 years36%23%41%43 years34%22%44%44 years32%21%47%45 years30%20%50%46 years28%19%53%47 years26%18%56%48 years24%17%59%49 years22%16%62%50 years20%15%65%51 years18%14%68%52 years16%13%71%53 years14%12%74%54 years12%11%77%55 years and above10%10%80%

You can exercise any of the investment choice as per your wish. You can also switch from one option (PMFs and investment approach) to another. The investment option in Tier I and Tier II are completely independent of each other.

NPS tax benefits

One of the reasons why people invest in this scheme is the tax benefit on NPS. Below are some of the ways in which you can claim tax deductions under different sections of the Income Tax (IT) Act.

Applicable sections of IT ActTax deductionsSection 80CCD (1)An individual’s contributions in Tier I entitled for tax deductions up to Rs 1.5 lakhs.Section 80CCD 1(B)In addition to the tax deductions under Section 80CCD (1), the individual can claim tax deductions of up to Rs 50,000 for the investments in Tier I NPS Account.Section 80CCD (2)Employees having Tier I investments are entitled to claim tax deductions up to 14% for Central Government contributions, and it is 10% for others. One can claim the deductions over and above the ones applicable under Section 80C.

Planning for retirement is a challenge, and it’s tricky to know exactly how much you’ll need to sail through your retirement years beforehand. You can opt for NPS and supplement your retirement savings to build a retirement corpus which complements your financial needs.

Disclaimer: Consult your financial planner prior to investing in NPS.

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