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.
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.
|Features||Tier 1 Account||Tier 2 Account|
|Who is eligible to open||Resident or non resident Indian||Only Tier 1 Account holder|
|Minimum Yearly contribution||Rs. 6000||Rs. 1000 (For account opening only)|
|Minimum Amount of contribution||Rs. 500||Rs. 250|
|Income tax benefits||Available||Not Available|
|Transfer of funds||Tier 1 to Tier 2 transfer in NOT allowed||Transfer 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.
Now customer can decide the Asset classes in which funds are to be invested and their percentages
|Asset Classes||Nature of Risk||Percentage allowed||Invested in||Average return since launch (%)|
|E||High return - High Risk||Maximum 50% of Fund||Index based Stocks||3.79%|
|C||Medium return - Low risk||Bonds issued by State Govt, PSUs, and private firms||8.66%|
|G||Medium return - low risk||Bonds 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.
- 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.
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.
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