NPS or National Pension Scheme is a government initiative that enables its subscribers to contribute to his/her pension during the working life. This is a govt sponsored pension scheme launched in 2004.
This scheme basically allows you to contribute a minimum of Rs 6000 per year in your own pension scheme and reap benefits post retirement. It is controlled by pension fund regulatory development authority (PFRDA).
NPS allows maximum investment of Rs1.5 lakh to be tax exempted under the section 80C. Additional Rs. 50,000 is allowed for tax deduction under section 80CCDIB.
NPS comes under the EET status which means there is exemption on investment, exemption on returns earned but taxation on redemption.
1. Only people between the ages 18 to 60 years can opt for the scheme
2. Should be Indian citizen
1. Minimum annual deposit should be Rs. 6000
2. Ages limit is 18 to 60 years
3. Withdrawal at the time of retirement is distributed into lumpsum and annuity scheme
4. Maximum 40% of the total corpus can be withdrawn tax-free
5. 40% must be invested in annuity scheme for regular monthly income post retirement
6. Remaining 20% can also be invested in annuity plan or withdrawn as lumpsum with tax applicability.
Categories of NPS Accounts
NPS comes with two variants providing an option in withdrawal means.
Tier 1 Account
Tier 1 accounts have restrictions on premature withdrawal. These are more of corporate accounts where in the employer also contributes to employee’s NPS account.
Wipro was the first private organisation to start with NPS accounts for employees.
For govt employees– 10% of basic + DA
Govt makes equal contribution
For others– Minimum Rs. 500
Also, Minimum of Rs. 6000 per year.
Note: the employer’s contribution to NPS is over and above EPF.
Tier 2 Account
Tier 2 accounts are more of voluntary accounts which have no restriction over withdrawals. To open a Tier 2 account, Tier 1 account is mandatory.
1. Savings account
2. Withdraw anytime
3. No contribution from employers
4. No tax exemption
Opening fee- Rs. 1000
Monthly contribution- Rs. 250
Note: A minimum of Rs. 2000 is mandatory to be deposited by the end of every year and the treatment of returns is same as mutual funds in case of Tier 2 account.
Investing in NPS
There are three modes of investing in NPS namely-
2. Corporate Debt
3. Govt Securities.
NPS Investment Proportion
The proportion of investment in the above mentions categories can vary as per choice and nature of job. There are three choices under this;
1. Active choice- In this option, Investor decides the proportion percentage
A maximum of 50% can be added to equity funds here.
2. Auto Choice- In this option, the distribution is done according to the age of investor by pre-defined rules.
3. Default Choice- In this option, 55% of your funds get allocated towards Govt. Securities.
Note: If you are a govt employee, Default choice is a mandate.
7 Fund Managers to Invest in NPS
1. HDFC Pension Management Company
2. ICICI Prudential Life Insurance Company
3. Kotak Mahindra asset Management Company
4. LIC Pension Fund
5. Reliance Capital Asset Management Company
6. SBI Pension Fund
7. UTI Retirement Solutions
Where to open NPS Account?
You can open your NPS account at the following
• PSU Banks
• Some Private Banks like HDFC, ICICI etc
• Post Office
Withdrawal from NPS Account
You can start withdrawing cash from your NPS account after 10 years.
A maximum of 25% can be withdrawn after 10 years for following reasons
• Child’s Marriage
• Child’s higher education
• Buying or constructing house
• Illness of self, spouse or dependent
Note: A maximum of 3 withdrawals can be made at a gap of 5 years. In case of critical illness, the gap is not applicable.
NPS Calculator is a tool which provides with the estimates regarding retirement fund you will receive at age 60. It computes the total amount receivable and interest gained.
1. Current age
2. Retirement age
3. Monthly investment amount
4. Interest rate (presently it is 8%)
1. Interest gained
2. Pension wealth generated
3. Total tax savings