National Pension System – NPS – Things to know

National Pension System – NPS – is a retirement planning scheme offered by Government Of India. Further to add, NPS is a voluntary contribution scheme designed to cultivate a savings habit in people and in turn secure their retirement life. Amount thus contributed is used to create a pension fund which is managed by Pension Fund Managers. Pension fund  thus accumulated is later invested in annuity schemes designed by the Insurance company of your choice.

NPS - National pension system at a glance
Who can join National Pension System – NPS

Any individual whose age is between 18 years and 60 years as on date of joining of the scheme can join NPS. In fact individuals can be either resident or Non Resident Indians (NRI). Another key  point is that in case of government employees, your employer can also contribute towards your pension fund along with your investment.

How much amount we should invest in NPS -National Pension System

Two types of accounts are available in NPS – Tier 1 and Tier 2.

For a Tier 1 account you should invest a minimum amount of Rs. 6000 per year. But the minimum one time contribution is Rs. 500. Where as for Tier 2 account the minimum single investment is Rs. 1000

Difference between Tier 1 and Tier 2 account of NPS

Tier 1 account is mandatory for investing in NPS . Further to note employee as well as employer  can contribute to a Tier 1 NPS account. Contrary to this only owner of the account can contribute to tier 2 account. It is important to realise that all the income tax benefits mentioned later in this post is available only for tier 1 account.

FeaturesTier 1 AccountTier 2 Account
Who is eligible to openResident or non resident IndianOnly Tier 1 Account holder
Minimum Yearly contributionRs. 6000Rs. 1000 (For account opening only)
Minimum Amount of contributionRs. 500Rs. 250
Income tax benefitsAvailable Not Available
Transfer of fundsTier 1 to Tier 2 transfer in NOT allowedTransfer from Tier 2 to tier 1 is allowed at any time.

As mentioned above, to sum up, any body can open tier 1 account whereas, only tier 1 account holders can open tier 2 account. All things considered tier 2 account is more or less a savings account.

How to Join  National Pension System -NPS.

You can join NPS either by Online or by Offline methods.

  • Online Method

Pension Fund Regulatory and Development Authority (PFRDA) has created an online portal eNPS to help people to join NPS through online method.

  • Offline Method

However in Offline method, NPS is distributed through authorised entities called Points of Presence (POP’s) and almost all the banks (both private and public sector) are enrolled to act as Point of Presence (POP) under NPS apart from several other financial institutions. You can find POP’s near you from here.

Fund management in National Pension System NPS

The funds developed from the contributions are invested by the PFRDA registered Pension Fund Managers (PFM’s). And as of now investors can select from following pension fund mangers.

  • ICICI Prudential Pension Fund
  • LIC Pension Fund
  • Kotak Mahindra Pension Fund
  • Reliance Capital Pension Fund
  • SBI Pension Fund
  • UTI Retirement Solutions Pension Fund LIC Pension Fund
  • HDFC Pension Management Company
  • DSP Blackrock Pension Fund Managers

Two different fund management schemes are available for investors to choose.

  • Active Choice

    Now customer can decide the Asset classes in which funds are to be invested and their percentages

Asset ClassesNature of RiskPercentage allowedInvested inAverage return since launch (%)
EHigh return - High RiskMaximum 50% of FundIndex based Stocks3.79%
CMedium return - Low riskBonds issued by State Govt, PSUs, and private firms8.66%
GMedium return - low riskBonds issued by central Govt.5.92%
  •  Auto choice (Life cycle fund)

    View the info graphics given below to get an idea about the investment pattern of  Auto Choice. If you cannot view the graph please refresh the page. Place the mouse over the graph to view the values.

Income Tax benefits  available for investment in NPS – National Pension System
  • Employees Contribution

Employees can claim up to  10% of (Basic +DA) while self employed can claim up to 10% of gross income under section 80CCD(1). This includes the maximum 1,50,000 benefit under section 80c.

  • Employers Contribution

Employers contribution towards NPS can be claimed by employees up to 10% of (Basic +DA) or amount contributed by employer whichever is less.

  • Additional Benefit of Rs 50000 u/s 80 CCD(1B)

In fact the additional 50000 benefit available  under section 80CCD(1B) is over and above 80C limit.

Taxation of National Pension System – NPS on Maturity

As of now 40% of lump sum withdrawal is tax free whereas 60% of the withdrawal is taxable. Further to add 40% of the fund which is converted into annuity will be taxed every year based on the Income Tax slab of the individual for that particular year.

Withdrawal from National Pension System – NPS

Tier 2 Account holder can withdraw funds from his any time without any restrictions. Where as for tier 1 account holders, as he attains his retirement age, 40% of accumulated fund has to be used to purchase a pension plan from an approved insurer. As of now the remaining 60% can be withdrawn at his will.

Conclusion

In the final analysis, National Pension System has its advantages like income tax benefits for contributions, employer contribution etc. At the same time low liquidity and the taxation of maturity returns and annuity portion takes the lustre out of this product.

Anish L J
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Anish L J

Anish L J is a finance, insurance and software consultant with more than 18 years of experience in these fields. He thoroughly follows developments in insurance and finance. 'INSURANCE FUNDA' (www.insurancefunda.in) is his endeavour to provide simple and solid solutions in the Insurance and Finance sectors.
Anish L J
Follow me

Anish L J

Anish L J is a finance, insurance and software consultant with more than 18 years of experience in these fields. He thoroughly follows developments in insurance and finance. ‘INSURANCE FUNDA’ (www.insurancefunda.in) is his endeavour to provide simple and solid solutions in the Insurance and Finance sectors.

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