National Pension Scheme (NPS)

 Hello Friends,

Today we are going to explore National Pension Scheme (NPS) details.

As the name suggests, this option of investment has been designed to tackle the needs after retirement of an individual. It has been started in 2004 for the Government Employees and allowed for others in 2009. A person who wants to opt this investment of NPS has to contribute some amount while he or she is earning and later on some allowed amount can be withdrawn at the time of retirement. This amount will be called as "Corpus" which includes the contribution made by the investor and growth on that investment. At the time retirement some part of this corpus can be withdrawn and remaining amount will be used to buy an "Annuity" which provides periodically income of pension. 

The objective of NPS is to provide the old age income which can help the individual to tackle the financial requirements after retirement. The functions of NPS are being regulated by Pension Fund Regulatory and Development Authority (PFRDA). Any person whose age is between 18 and 65 can start investing in NPS. After submitting an application the investor gets allotted with Permanent Retirement Account Number (PRAN). This unique account number remains same during the entire life of an investor. At the time initiating the application NPS there are two options of account which are 1] Tier I and 2] Tier I and Tier II.  A person who wants to begin with NPS has to open Tier I account compulsory and Tier II account is an optional. The returns on this investment depends upon the performance Pension Fund chosen by the investor. Investment in NPS attracts Tax benefits under various sections of Income Tax act which we will be talking about later during the process of this blog. Now let us know more about Tier I and Tier II accounts.

Tier I Account:- This account is mandatory to begin with NPS and investment made in this account can not be withdrawn as the purpose of this account is retirement planning. Investment done in this account can give us tax benefits as well. We can not begin with NPS without opting for this account. To open Tier I account investor has to invest minimum Rs. 500 at the time of account opening. IN Tier I account there should be minimum one transaction of investment per year and the minimum investment contribution has to be Rs. 1000 per year.

Tier II Account:- This account is an optional where investor can voluntarily invest in this account. The investment made in this account does not offer tax benefits, however this account does not have any restrictions of withdrawn. Any individual can not open only Tier II account alone, to open Tier II account one needs to have Tier I account as well. To open Tier II account investor has to contribute minimum 1000 Rs at the time of initiation of Tier II account. Tier II account does not need minimum contribution per year. Investor can invest in this account if he or she wishes to do so. 

This clearly indicates that investor can either open only Tier I account or Tier I plus Tier II account  as per his or her desire. If any Employer is contributing for the NPS of Employee then employer can not contribute that amount under Tier II account. At the time of retirement 60% amount from the corpus can be withdrawn by the investor and 40% has to be kept for the Pension. Investment in NPS has various diversification such as Equity Funds, Government Securities, Corporate Debts, Fixed Deposits and Liquid Funds. The portfolio of investor will be managed by the experienced Pension Fund Managers. There are total 8 Pension Fund Managers who have been managing the investment in NPS which are mentioned below

1] Aditya Birla Sunlife Pension Management Limited

2] ICICI Prudential Pension Fund Management Company Limited

3] Kotak Mahhindra Pension Fund Limited

4] Reliance Capital Pension Fund Limited

5] SBI Pension Funds Limited

6] LIC Pension Fund Limited

7] UTI Retirement Solutions Limited

8] HDFC Pension Management Company Limited

Investor has an option to select any one of these 8 Pension Fund Management options. The Pension Fund Management can be changed only once in a year. For the NPS investment of Government Employees there are only 3 Pension Fund Managements among the list of these 8, these are  SBI Pension Fund, LIC Pension Fund, UTI Retirement Solutions Limited. 

There are various schemes of Investment in NPS which are given below

1] Scheme E:- here E indicates Equity, it may have high returns however the risk is also high in this. 

2] Scheme C:- here C indicates Corporate Bonds

3] Scheme G:- here G indicates Government Securities

4] Scheme A:- here A indicates Alternative assets, this option is not allowed for Tier II investment account.

Investor has two choices known as Active Choice and Auto Choice, with the option of Auto Choice investor allows the system to invest it as per the age of the investor and in this option the maximum investment in Equity can be up to 75% of the total investment, however it goes shuffled as the age increases of the investor, as the investor gets old the percentage of Equity investment goes down. The returns on the investment either in Active Choice of Auto choice does not have any fixed Rate of Interest and it depends upon the performances of the schemes he or she has chosen to invest in. Therefore it is highly recommended that one should opt for Auto Choice if he or she is not much aware about the investment strategy, market and other analysis. 

Now let us see the Income Tax impact with the help of investment in NPS

Let us check it for Self Employed or a professional person:-

* Investment up to 1,50,000/- Under Section 80 C

* Additional Investment of Rs. 50,000/- in investment will be deducted from the taxable income under section 80CCD (1B) over and above the section 80 C ( 80 C has a limit of Rs. 1,50,000).

Let us check if for Salaried Individual:-

* Investment up to 1,50,000/- Under Section 80 C

* Additional investment of Rs. 50,000 in NPS can help the employee to get more tax benefits under section 80CCD (1B)

* Employees get more tax benefits if their employer is also contributing for the NPS of an Employee, for this there is a maximum limit from the contribution, the limit is of 10% of the salary (Basic Salary + Dearness Allowance ).This section is allowed only to the salaried people if employer is contributing in their NPS account. Many people are unaware about it and have much confusion about this section, however this section can be useful to save more tax.

Any investment made in Tier II account does not offer the tax benefits as interment in Tier II can be  withdrawn any time

Now let us see the rules of Withdrawing money from NPS. There are the instances where money can be withdrawn and those are mentioned below

1] Upon the age 60 of the investor:- At the age 60 investor can withdraw 60% amount from his corpus and there is no any tax has to be paid against that withdrawal. Remaining 40% of the corpus has to be used to buy Annuity. At the time of age 60 if the total corpus is less than Rs, 2,00,000/- then he or she can withdraw the entire 100% amount. However only 60% of that withdrawn amount will be tax free and remaining 40% will attract taxation. 

2] In case of a death of the investor:-  If the investor dies during the time of investment then nominee or nominees have the option to withdraw 100% amount and tax too Tax Free withdrawal. However if nominee wants to continue that NPS account then he or she will have to open NPS account with his or her name and all rules will be applicable to that new NPS account.

3] Emergency Partial Withdrawal:- Any investor can apply for the partial withdrawal after 3 years of NPS initiation. However only 25% of the contributed amount can be withdrawn by him or her. This 25% amount does not mean the amount of accumulation ( Accumulation it means contribution + growth ). Any NPS user can go for partial withdrawal only for 3 times during the life cycle of NPS and he or she an withdraw only up to 25% of the contributed amount. Every Partial Withdrawal should have a purpose like 

a] Higher Education of Children

b] Marriage of Children

c] Purchase or Construction of House or a Flat

d] Treatment of Specific Illness 

4] Premature Exit from NPS:- One can Exit from NPS after 10 years of initiating NPS account. At that time 80% amount of the accumulation will be used to purchase an Annuity and investor can withdraw 20% of the Accumulation amount as a Tax Free. If the total Accumulation is less than Rs, 1,00,000/- then investor can withdraw 100% of the Corpus, however only 40% will be tax free and remaining 60% amount will attract tax calculations. 

These are the important points of NPS, any individual investor should consult an expert as the Tax Rules may get change in new Financial Years. Please share your views if you like this article and post questions in the comment box.  We will meet in another topic where we will be focusing on Income Tax and its rules. Thank you.