NPS: Demystifying the Investment Vehicle

National Pension System (NPS) is an investment cum pension regulated by the Pension Fund Regulatory and Development Authority (PFRDA). On retirement or exit from the scheme, the Corpus is made available to him/her with the mandate that some portion of the Corpus must be invested into an Annuity to provide a monthly pension post-retirement or exit from the scheme.

On retirement or exit from the scheme, the Corpus is made available to him/her with the mandate that some portion of the Corpus must be invested into an Annuity to provide a monthly pension post-retirement or exit from the scheme. NPS also allows you to save tax at the same time.

NRIs and OCIs can also join NPS (National Pension Scheme)

Link: Start your NPS Journey

Advantages of Investing in NPS

Whether self-employed or working with a Corporate, NPS offers exclusive tax benefits over and above the 80C limit. Further, if your  80C limit is not exhausted, you can still invest in NPS to avail yourself of tax benefits under 80C.

For Self Employed Individuals

1. An Individual can invest up to 20% of their Gross Annual Income (to the extent of 1.5 lahks is eligible for tax deduction u/s 80CCD (1) of Income Tax Act, 1961.)
2. Post this, one can invest up to Rs.50,000 and avail of tax deductions u/s 80CCD (1B) of the Income Tax Act, 1961. This tax benefit is over & above the tax benefits claimed under 80C

For Salaried Individuals

1. An Individual can invest up to 10% of their Salary (Basic + DA) (to the extent of 1.5 lahks is eligible for tax deduction u/s 80CCD (1) of Income Tax Act, 1961.)
2. Post this, a salaried employee can invest up to Rs.50,000 and avail tax deductions u/s 80CCD (1B) of the Income Tax Act, 1961
3. Under the Corporate NPS scheme, employees can get additional tax benefits on investments routed through their employer. Such investment up to 10% of Salary (Basic + Dearness Allowance) to the extent of Rs 7.5 lakh is deductible from taxable income u/s 80CCD (2) of the Income Tax Act, 1961
   

Kindly note the following:

The total deduction limit for Sections 80C + 80CCC + 80CCD(1) + Section 80CCD(1B) = ₹ 2,00,000

Link: Start your NPS Journey

Investment under NPS

NPS offers you the flexibility to select the investment strategy under

• 4 asset classes and
• 2 investment strategies

There are 4 asset class options under NPS – Equities(E), Corporate Bonds(C), Government Securities(G), and Alternative Investment Funds(A). 

The list of the different pension funds is given through this link

Different types of NPS Accounts

As an investor, we need to keep the following in mind before initiating the journey of investing

1. You can have different Investment Choices (Auto / Active) for Tier I and Tier II NPS account
2. You can change the Asset Mix and Investment Choice twice in a financial year for both Tier I and Tier II NPS Account
3. You can change the Pension Fund Manager once in a financial year.

Tier I NPS Account

1. It is mandatory to open a Tier I NPS account if you wish to join NPS
2. Withdrawal from this account is restricted and conditional.
3. You can open a Tier I NPS Account with a contribution as low as Rs.500/-. To keep the Tier I NPS Account active, you need to deposit a minimum of Rs.1,000 each year.

Tier II NPS Account

1. Tier II NPS Account is optional and can be opened either at the time of Tier I NPS Account opening or later.
2. You can withdraw from this account anytime.
3. Tier II NPS Account can be opened with an initial minimum contribution of Rs.1,000/-. There is no requirement of depositing any minimum amount each year to keep the Tier II NPS Account active.

Link: Start your NPS Journey

Condition for NPS Exit and Withdrawals

If there is a need for money, partial withdrawal or early exit option is available from Tier-1 of the NPS Account

Conditions for Partial Withdrawal from NPS

1. A total of 3 withdrawals can be made over the lifetime of NPS
2. The first withdrawal can be exercised after 3years of account opening (similar to ELSS)
3. Like in the case of PPF, an individual can withdraw a fraction of the contribution (in this case up to 25% of their contribution)
4. The 25% rule is not on the Corpus but on the contribution amount
5. Subsequent withdrawal is allowed only on incremental contributions deposited by you after you have made your previous withdrawal.
6. Contribution deposited for availing tax benefit u/s 80CCD (1) and 80CCD 1 (B)  shall be considered for calculation of the withdrawal limit
7. The second and third withdrawals can be anytime after the first withdrawal

Conditions for Exit from NPS

1. Under Retail NPS, an exit from the scheme after 5 years of account opening or upon attaining 60 years of age
2. Under Corporate NPS, an exit from the scheme after 5 years of account opening or upon attaining the retirement age defined by your corporate.
3. The payout in terms of the amount which can be withdrawn or invested in an Annuity depends on the age at which you exit the scheme.

Link: Start your NPS Journey

Tax Consideration for NPS on Maturity

1. You can withdraw up to 60% of Corpus (tax-free)
2. You need to invest the balance amount into an Annuity and the pension received is treated as income and will be taxed appropriately
3. If you are not sure about withdrawal, you can start an annuity and defer withdrawal. You need to withdraw the corpus by the age of 75 in a maximum of 10 installments
4. If you are not sure about annuity, you can defer your annuity purchase till 75 years of age. You will have to withdraw the balance corpus immediately.
5. Any individual can continue contributing to NPS account till 75 years of age and avail of tax benefits on their investment. Under this, if you want to exit, the same can be done at any time by withdrawing up to 60% of Corpus and investing the balance amount in Annuity.

Link: Start your NPS Journey

Special Considerations under NPS

1. Pre-Mature Exit
   • The payout in terms of the amount which can be withdrawn or invested in an Annuity depends on the age at which you exit the scheme.
   • During Pre-Mature Exit, the withdrawal can be up to 20% of the Corpus, tax-free
   • The balance amount needs to be put into Annuity and income and will be taxed appropriately
   • If the Corpus is less than or equal to Rs 2.5 lakh, you can withdraw the entire amount without any obligation to invest in an Annuity.
2. Post-Maturity Exit
   • If the Corpus is less than or equal to Rs 5 lakhs, you can withdraw the entire amount without any obligation to invest in an annuity
3. Joining NPS Post 60 years of age
   • You get the flexibility to exit from the scheme at any time
   • An exit after 3 years of account opening shall be treated as a normal exit and an exit before 3 years of account opening shall be treated as a premature exit

Link: Start your NPS Journey

List of NPS Fund Management Charges

• Point of Presence (POP) Charges like Account Opening, Contribution Processing, Non-Financial Transaction Processing, Persistency
• Central Record Keeping Agency (CRA) Charges like PRAN Generation, Annual Maintenance, Financial Transaction Processing
• Pension Fund Manager (PFM) Charges (this is charged as per slab of investment ( Asset Under Management(AUM) slab)
• Other Intermediary Charges like Custodian Fees and NPS Trust
• Payment Gateway Charges (UPI and RuPay Debit Card – Free, Net Banking – INR Rs. 3, Credit Card – 0.85% of the Contribution)

Link: Start your NPS Journey

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