The National Pension System (NPS) is a retirement benefit program created by the Indian government to provide each subscriber with a steady income after retirement. It is an effort to find a long-term solution to the issue of giving each Indian person a sufficient retirement income.
Every subscriber receives a specific Permanent Retirement Account Number (PRAN), which serves as the foundation for this system. The NPS is governed by the PFRDA (Pension Fund Regulatory and Development Authority).
Types Of NPS Accounts
You have the option to create two subaccounts under one PRAN. In NPS, these subaccounts are referred to as tiers.
- Tier 1
The applicant must fund this requirement and restricted withdrawal account using their retirement savings. According to the current Income Tax regulations, the applicant may claim tax benefits against the payments made to this retirement account.
- Tier 2
Tier 2 is basically a facility for voluntary savings. The applicant will have complete discretion over when to withdraw his or her savings from this account. Since this is not a retirement account, the applicant cannot deduct contributions to it from taxes.
Distinctive Features & Benefits Of The National Pension System
The National Pension System offers the following benefits to the subscribers:
- Economical Scheme: The NPS is considered the most affordable pension plan in existence. The administrative costs and fund management fees are at their lowest.
- Flexibility: You have the freedom to choose or modify the fund manager, investment strategy, and POP (Point of Presence). This guarantees that you can use numerous asset classes and fund managers to maximize returns in accordance with your comfort level.
- Higher Returns: A portion of the NPS is invested in stocks. As compared to other conventional tax-saving investments like the PPF, it provides returns that are far higher. This program has been running for more than ten years and has so far generated returns of 8% to 10% annually.
- Portability: Even if the applicant changes their city, work, etc., they can manage an account from anywhere in the nation, pay contributions through any POP-SP branch, and even make payments through eNPS, regardless of which POP-SP branch they are registered with. If the subscriber secures employment, the account can be moved to any other sector, such as the public sector or the corporate model.
- Equity Allocation: You may invest up to 50% of your total amount in stocks. Investment options under the NPS include active choice and auto choice.
Under the auto choice, your investments’ risk profile is determined automatically based on your age. Whereas, the active choice enables you to choose the scheme and divide your investments.
- Transparency: As was previously discussed, PFRDA regulates NPS, ensuring clear guidelines for the activities. NPS Trust complies with the rules and regulations regularly.
- Tax Benefits: Section 80 C CD (1B) allows you to claim a tax exemption of up to Rs. 50,000. This benefit exceeds the Section 80 C limit of Rs. 1,50,000.
Individuals who are employed can invest up to 10% of their basic pay plus a dearness allowance and claim a tax exemption under Section 80 C CD (1). For self-employed, this percentage is up to 20%. According to Section 80 C of the Income Tax Act of 1961, this tax exemption is limited to a cap of Rs. 1,50,00,00.
Who Should Go For National Pension System?
Anyone who wants to start planning for retirement early and has a low tolerance for risk should consider the NPS. In fact, salaried individuals who desire to maximize their 80C deductions can also take this plan into consideration.
It goes without saying that having a steady pension (income) throughout your golden years will be a blessing, especially for those who leave private-sector employment. Your life after retirement could significantly improve with such a methodical investment.
How To Open an NPS Account?
PFRDA offers both online and offline processes to open an NPS account.
- Online Process
An NPS account can now be opened online through enps.nsdl.com if you link your account to your PAN, Aadhaar, and mobile number. An OTP will be sent to your mobile devices, which can be used to verify the registration. Your PRAN (Permanent Retirement Account Number), which you can use for NPS login, will be generated as a result.
- Offline Process
- Firstly, you need to procure a PRAN application form from any of the nearest PoP – Point of Presence you wish to register with.
- After that, submit your PRAN application form along with the KYC papers to the PoP.
- The Permanent Retirement Account Number (PRAN) will be sent to you by the PoP once you have made the initial contribution.
- You can now manage your account using this number and the password in your sealed welcome package.
Contributions Under National Pension System (NPS)
The subscriber may pay the required amount at his or her preferred PoP using cash, a local check, a demand draft, or the Electronic Clearing System (ECS). The minimum NPS payment to be made to each account is shown in the table below:
|Description||Tier 1||Tier 2|
|Minimum contribution for opening account||Rs. 500||Rs. 1000|
|Minimum amount per contribution||Rs. 500||Rs. 250|
|Minimum contribution per year||Rs. 1000||NIL|
|Minimum frequency of contributions per year||1||NIL|
Investment Options Under National Pension System
Under NPS, the subscriber’s choice will determine how the money is invested. There are several different funds and investing options available under NPS.
The subscriber can choose their asset allocation under the Active Choice option according to their preferences. This asset allocation is susceptible to various limitations due to age.
The subscribers can choose from four distinct asset classes to invest in:
- Asset Class E: Equity and its related instruments
- Asset Class C: Corporate debt and debt-associated instruments
- Asset Class G: Government bonds and various government-backed securities
- Asset Class A: Alternative investment options including REIT (Real Estate Investment Trusts), CMBS (Commercial Mortgage-Backed Securities), venture capital fund, etc.
NPS subscribers can use the Auto Choice option if they lack the ability to choose their own asset allocation. According to this choice, money is distributed according to subscriber age.
The three risk-based investment options under the Auto Choice option are:
- LC 75: Aggressive Life Cycle Fund
- LC 50: Moderate Life Cycle Fund
- LC 25: Conservative Life Cycle Fund
Withdrawal/Exit Rules Of The National Pension System
Here are the withdrawal/exit rules under the National Pension System:
- Upon Becoming 60 Years Old
If the subscriber leaves NPS while he/she is 60 years old, at least 40% of the total pension of the subscriber is utilized to purchase an annuity (that will pay the subscriber a monthly pension) and the remaining amount must be paid to the subscriber as a lump sum. The subscriber may choose a 100% lump sum withdrawal if the entire accumulated corpus is less than Rs. 5 Lacs.
The subscriber does have the choice to postpone the lump sum withdrawal until they are 75 years old. Additionally, subscribers have the option to keep making contributions until they are 75 years old. This option must be exercised within 15 days of becoming 60 years old.
- Before Turning 60 Years Old
It is only after serving 10 years in the NPS that the subscriber is eligible to leave NPS before turning 60. If the subscriber is below 60 years old and leaves NPS, at least 80% of the subscriber’s total pension asset must be used to purchase an annuity that will pay the subscriber a monthly pension, and the remaining 20% must be paid to the subscriber as a lump sum. If the subscriber’s total accumulated corpus is less than Rs. 2.5 lac, they may choose to withdraw 100% of their money in one single sum.
- Death of the Subscriber
In case of the unfortunate death of the subscriber, the nominee will have the opportunity to receive 100% of the NPS pension asset in a lump amount. However, the nominee must enroll in NPS individually after complying with the required KYC procedure if they want to continue with the NPS.