National Pension Scheme

 

Pension plans provide financial security and stability during old age when people don’t have a regular source of income. Retirement plan ensures that people live with pride and without compromising on their standard of living during advancing years. Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement.

According to United Nations Population Division World’s life expectancy is expected to reach 75 years by 2050 from present level of 65 years. The better health and sanitation conditions in India have increased the life span. As a result number of post-retirement years increases. Thus, rising cost of living, inflation and life expectancy make retirement planning essential part of today’s life. To provide social security to more citizens the Government of India has started the National Pension System.

 The Central Government has introduced the National Pension System (NPS) with effect from January 01, 2004 (except for armed forces). NPS was made available to All Citizens of India from May 01, 2009.

Pension Fund Regulatory and Development Authority (PFRDA), the regulatory body for NPS, has appointed NSDL as Central Recordkeeping Agency (CRA) for National Pension System. CRA is the first of its kind venture in India which will carry out the functions of Record Keeping, Administration and Customer Service for all subscribers under NPS.

CRA shall issue a Permanent Retirement Account Number (PRAN) to each subscriber and maintain data base of each Permanent Retirement account along with recording transactions relating to each PRAN.

 1. What is National Pension Scheme (NPS)?

National Pension System (NPS) is a pension cum investment scheme launched by Government of India to provide old age security to Citizens of India. It brings an attractive long term saving avenue to effectively plan your retirement through safe and regulated market-based return. The Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA).National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.

2.Who should invest in the NPS?

The NPS is a good scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private-sector jobs. A systematic investment like this can make a massive difference to your life post-retirement. In fact, Salaried people who want to make the most of the 80C deductions can also consider this scheme.

3.Advantages:

Opening NPS account has its own advantages as compared to other pension product available. Below are few features which make NPS different from others:

  1. Low cost product
  2. Tax breaks for Individuals, Employees and Employers
  3. Attractive market linked returns
  4. Easily portable
  5. Professionally managed by experienced Pension Funds
  6. Regulated by PFRDA, a regulator set up through an act of Parliament

4.Who can join NPS?

Any individual citizen of India (both resident and Non-resident) in the age group of 18-65 years (as on the date of submission of NPS application) can join NPS.

This pension program is open to employees from the public, private and even the unorganized sectors except those from the armed forces.

 

5.NPS for NRI

Yes, an NRI can open an NPS account. Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time. However, OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) card holders and HUFs are not eligible for opening of NPS account.

6.How NPS works?

Upon successful enrolment, a Permanent Retirement Account Number (PRAN) is allotted to the subscriber under NPS. Once the PRAN is generated, an email alert as well as a SMS alert is sent to the registered email ID and mobile number of the subscriber by NSDL-CRA (Central Record Keeping Agency).Subscriber contributes periodically and regularly towards NPS during the working life to create the corpus for retirement. On retirement or exit from the scheme, the Corpus is made available to the Subscriber with the mandate that some portion of the Corpus must be invested in to Annuity to provide a monthly pension post retirement or exit from the scheme.

 

7. Who should invest in the NPS?

The NPS is a good scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private-sector jobs. A systematic investment like this can make a massive difference to your life post-retirement. In fact, salaried people who want to make the most of the Section 80 deductions can also consider this scheme.

 8. Features & Benefits of NPS

a. Returns/Interest

A portion of the NPS goes to equities (this may not offer guaranteed returns). However, it offers returns that are much higher than other traditional tax-saving investments like the PPF. This scheme has been in effect for over a decade, and so far has delivered 8% to 10% annualized returns. In NPS, you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.

b. Risk Assessment

Currently, there is a cap in the range of 75% to 50% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age. However, for an investor of the age 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe from the equity market volatility. The earning potential of NPS is higher as compared to other fixed-income schemes.

c. Tax Benefit available to Individual:
Any individual who is Subscriber of NPS can claim tax benefit under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac under Sec 80 CCE.

 

Exclusive Tax Benefit to all NPS Subscribers u/s 80CCD (1B)
An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. 1961.

 

Overall Tax Benefit under NPS will be Rs. 2 Lacs.

 Tax Benefits under the Corporate Sector:

  1. Corporate Subscriber:
    Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer’s NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit.

 

  1. Corporates:
    Employer’s Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

d. Withdrawal Rules After 60

A person on maturity at the age of 60 would be able to withdraw up to 60 % of the corpus without payment of tax. The balance 40 percent of the corpus would have to be compulsorily used to buy an annuity plan. The annuity received is taxable in the year of receipt.

e. Early Withdrawal and Exit rules

As a pension scheme, it is important for you to continue investing until the age of 60. However, if you have been investing for at least three years, you may withdraw up to 25% for certain purposes. These include children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others. You can make a withdrawal for up to three times (with a gap of five years) in the entire tenure. These restrictions are only imposed on tier I accounts and not on tier II accounts.

f. Equity Allocation Rules

The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. You can allocate a maximum of 50% of your investment to equities. There are two options to invest in – auto choice or active choice. The auto choice decides the risk profile of your investments as per your age. For instance, the older you are, the more stable and less risky your investments. The active choice allows you to decide the scheme and to split your investments.

g. Option to change the Scheme or Fund Manager

With NPS, you have the provision to change the pension scheme or the fund manager if you are not happy with their performance. This option is available for both tiers I and II accounts.

9. How to open an NPS account

PFRDA regulates the operations of the NPS, and they offer both an online as well as an offline means to open this account.

a. Offline Process

To open an NPS account offline or manually, you will have to find a PoP – Point of Presence, (it could be a bank too) first. Collect a subscriber form from your nearest PoP and submit it along with the KYC papers. Ignore if you are already KYC-compliant with that bank. Once you make the initial investment (not less than Rs.500 or Rs.250 monthly or Rs. 1,000 annually), the PoP will send you a PRAN – Permanent Retirement Account Number. This number and the password in your sealed welcome kit will help you operate your account. There is a one-time registration fee of Rs.125 for this process.

b. Online Process

It is now possible to open an NPS account in less than half an hour. Opening an account online (enps.nsdl.com) is easy, if you link your account to your PANAadhaar and mobile number. You can validate the registration using the OTP sent to your mobile. This will generate a PRAN (Permanent Retirement Account Number), which you can use for NPS login.

10. Types of NPS Account 

The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. The table below explains the two account types in detail.

    Particulars NPS Tier-I Account NPS Tier-II Account
  Status Default Voluntary
  Withdrawals Not permitted Permitted
  Tax exemption Up to Rs 2 lakh p.a.(Under 80C and 80CCD) 1.5 lakh for government employees.

Other employees-None

 Minimum NPS contribution Rs 500 or Rs 500 or Rs 1,000 p.a. Rs 250
 Maximum NPS contribution No limit No limit

The Tier-I account is mandatory for everyone who opts for NPS scheme. The Central Government employees have to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.

11. Comparing NPS scheme with other Tax Saving Instruments 

Public Provident Fund (PPF) and Tax-saving Fixed Deposits (FD). Here is how they are in comparison to the NPS:

 

Investment Interest Lock-in period Risk Profile
NPS 8% to 10% (expected) Till retirement Market-related risks
ELSS 12% to 15% (expected) 3 years Market-related risks
PPF 8.1% (guaranteed) 15 years Risk-free
FD 7% to 9% (guaranteed) 5 years Risk-free

 

The NPS can earn higher returns than the PPF or FDs, but it is not as tax-efficient upon maturity. For instance, you can withdraw up to 60% of your accumulated amount from your NPS account. Out of this, 20% is taxable. Taxability on NPS withdrawal is subject to change.

7. Comparing NPS with ELSS 

The good thing about the National Pension Scheme is that it has equity allocation. However, the equity allocation is still not as much as tax-saving mutual funds. Equity-Linked Savings Schemes invest primarily in equities and can generate higher returns than the NPS. The lock-in period of tax-saving mutual funds is also lesser than NPS – only three years compared to NPS. Also, if you are an aggressive risk-seeker, equity exposure by NPS won’t be sufficient in the long run. Since ELSS can meet that requirement, it serves investors with more risk-appetite better.

Amendments in Budget 2019:

  1. In Budget, which was tabled in July and later approved by the Parliament, the government had raised the income tax exemption limit on withdrawal from NPS corpus on retirement, or reaching the age of 60, to 60% from 40%.
  2. For central government employees, Section 80CCD(2) of the Income Tax Act has been amended to allow exemption of employer contribution up to 14% of the salary of central government employees. This is not applicable for private sector employees
  • The government has also allowed own contribution by central government employees to Tier II account qualify for income tax benefits under Section 80C, provided the money is locked in for a period of 3 years
  1. Earlier this year, pension fund regulator PFRDA gave government sector NPS subscribers more choice in terms of selecting fund managers to manage their NPS contributions. Central Government subscribers have been allowed to choose any one of the pension funds including private sector pension fund manager. Government employees have the freedom to choose asset allocations, allowing more equity exposure. Earlier it was capped at 15%.

 

 

 

 

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