NPS

NPS

National Pension Scheme (NPS) India is a voluntary and long-term investment plan for retirement under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government. We have covered the following in this article:

What is National Pension Scheme?

The National Pension Scheme (NPS) is a social security initiative by the Central Government. This pension programme is open to employees from the public, private, and even the unorganized sectors except those from the armed forces.

The scheme encourages people to invest in a pension account at regular intervals during the course of their employment. After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement.

Earlier, the NPS scheme covered only Central Government employees. Central Government employees joining on or after 01-01-2004 are mandatorily covered under the NPS. Now, however, the PFRDA has made it open to all Indian citizens on a voluntary basis.

The NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

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 in your life post-retirement. In fact, salaried people who want to make the most of the 80C deductions can also consider this scheme.

National Pension Scheme Benefits

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 9% to 12% 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.

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.

Regulated

The PFRDA regulates NPS with transparent investment norms and regular performance reviews and monitoring of fund managers by NPS Trust.

Flexibility

The NPS subscription is flexible. NPS subscribers can contribute to the NPS fund at any time in a financial year and can also change the amount of subscriptions. They can choose their own investment options. They can operate their account online from anywhere and continue it even when they change their city and employment.

National Pension Scheme Tax Benefits

Employee tax benefits for self-contribution:

Employee tax benefits on employer contributions:

Employer's contribution towards NPS of an employee is eligible for a tax deduction of up to 10% of salary, i.e., basic plus DA, or 14% of salary if such contribution is made by the Central Government under Section 80CCD(2) beyond the Rs.1.5 lakh limit provided under Section 80CCE.

Tax benefits for self-employed people:

Tax benefits on partial withdrawal from an NPS account:

Partial withdrawals from NPS are eligible for tax exemption when the amount withdrawn is up to 25% of self-contribution, subject to the circumstances and criteria prescribed by PFRDA under section 10(12B).

Tax benefit on annuity purchase:

Tax exemption is provided on annuity purchase or superannuation at 60 years under Section 80CCD(5). However, the subsequent income from an annuity is taxed under Section 80CCD(3).

Tax advantages on lump sum withdrawal:

Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation.

Corporate/employer tax breaks:

A tax deduction is provided on the amount contributed to an employee's NPS account as an employer contribution, up to 10% of the employee's salary (Basic + DA) of the employer's contribution as a 'Business Cost' from the Profit & Loss Account under section 36(1)(iv)(a).

National Pension Scheme Withdrawal Rules After Retirement (60 years)

Presently, a person can withdraw up to 60% of the total corpus as a lump amount, with the remaining 40% going into an annuity plan. Subscribers can withdraw the entire corpus if it is less than or equal to Rs 5 lakh without purchasing an annuity plan under the new NPS guidelines. These withdrawals are also tax-free.

For example, if a person has a Rs 4.5 lakh corpus, they can withdraw the entire sum after retirement. However, if the corpus exceeds Rs 10 lakh, the tax-free withdrawal limit is Rs 6 lakh. For the remaining Rs 4 lakh, they must get an annuity plan.

Although withdrawals are tax-free, an annuity is taxable based on the income bracket. As a result, if your annuity is worth Rs 4 lakh, it will be taxed at the individual's tax bracket rate. The payment is taxable in accordance with the years of payment.

National Pension Scheme Early Withdrawal or Exit rules

Upon Superannuation:

When a subscriber reaches the age of Superannuation/reaches the age of 60, he or she must use at least 40% of the accrued pension corpus to purchase an annuity that provides a regular monthly pension. The remaining monies are available for withdrawal as a lump payment.

Subscribers can take a 100% lump sum withdrawal if their entire accrued pension corpus is less than or equivalent to Rs.5 lakh.

Pre-mature exit:

In the event of a premature exit (before reaching the age of superannuation/turning 60), at least 80% of the Subscriber's accrued pension corpus must be used to purchase an Annuity that provides a regular monthly income. If the total corpus is less than or equal to Rs.2.5 lakh, the subscriber can opt for 100% lumpsum withdrawal.

Upon the death of the subscriber:

Following the subscriber's death, the entire accrued pension corpus (100%) would be paid to the subscriber's nominee/legal heir.

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 on the scheme and to split your investments.

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.

National Pension Scheme Eligibility

Any person fulfilling the following eligibility criteria can join NPS:

How To Invest In National Pension Scheme?

The Pension Fund Regulatory and Development Authority (PFRDA) regulates the operations of the NPS, and they offer both an online as well as an offline means to open this account.

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) registered with the PFRDA. 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.

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 PAN, Aadhaar, 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.