Having a retirement corpus is very essential and that is why you contribute towards a provident fund scheme during your employment tenure. While salaried individuals have the backing of the employee’s provident fund scheme, self-employed individuals look to create their own retirement corpus through investment into different avenues. There are different investment avenues for both salaried and self-employed individuals. The National Pension Scheme is one such avenue which helps you create a retirement corpus when you are working and also gives you a tax benefit. Let’s understand the scheme in details –
What is the National Pension Scheme?
NPS scheme was first introduced in the year 2004 by the Government of India. The scheme was designed to be a pension scheme covering the employees of the Government. However, in the year 2009, the NPS scheme was made open to all. Today, you can invest in the National Pension Scheme to build up a retirement corpus and also earn additional tax benefits in the process. The scheme is a market-linked scheme where your investments are invested in the market as per your preference. You can contribute towards the scheme when you earn an income. Thereafter, when you retire, the scheme can be redeemed. You can get a lump sum amount as well as annuity payments from the scheme which would help fund your retirement.
Who is eligible to invest in the National Pension Scheme?
Anyone who is aged between 18 and 60 years can buy the scheme. You can be a resident Indian or an NRI and you would be eligible to join the scheme. However, if you are an NRI and your citizenship status changes after you have bought the scheme, the scheme would terminate on such change.
How to invest in NPS?
To invest in the National Pension Scheme you would have to approach an authorised financial institution through which investment is allowed. Nowadays, every Indian bank and non-banking financial companies accept NPS investments. These institutions are called Point of Presence (POP) and each POP has an authorized branch through which you can make NPS investment. These authorized branches are called Point of Presence Service Providers or POP-SPs.
Though all banks and financial institutions are registered POPs, you can still check the list of POPs at the official website of Pension Fund Regulatory and Development Authority (PFRDA) https://www.npscra.nsdl.co.in/pop-sp.php. The National Pension Scheme is governed by the PFRDA and so POPs have to get themselves registered with PFRDA before they accept NPS investments.
Besides investing offline, you can also invest online. The registered POPs allow their customers with online banking facilities using which you can invest in the National Pension Scheme. You just have to log into your online bank account, fill up an online application form and apply. You can then invest the desired amount in the NPS scheme.
Documents required to invest
To invest in the National Pension Scheme you would have to submit the following documents –
- The Registration Form, filled and signed
- Your identity proof like PAN Card, Voter’s ID card, passport, Aadhar Card, etc.
- Proof of age like passport, voter’s ID card, PAN card, Aadhar Card, etc.
- Proof of address like driving license, passport, Aadhar Card, etc.
Types of NPS investment accounts
When you choose to invest in the NPS scheme, there would be two accounts to choose from. You can invest in only one account or in both accounts. The types of NPS accounts are as follows –
- Tier I AccountThis account is the compulsory account into which you would have to invest when you choose the NPS scheme. The minimum investment which you are required to do in Tier I Account is INR 500. You would also have to invest a minimum of INR 1000 into the account in one financial year.
Once invested, you cannot withdraw from Tier I account till the NPS scheme attains maturity. However, to provide liquidity to investors in times of need, National Pension Scheme allows you to withdraw from your Tier I investments at specified events. These events are as follows –
- If you are unemployed for a continuous period of 60 days and above
- If marriage expenses are to be paid
- If medical emergencies are to be financed
- If you want to buy a house, etc.
- Tier II AccountTier II Account is a voluntary account. You might invest in this account or only in Tier I Account. The benefit of Tier II Account is the fact that the account is flexible. You can invest whenever you want to and even withdraw from the account at any time. There are no limitations on withdrawals from Tier II Account. However, Tier II Account would be available only if you have invested in Tier I Account. The minimum investment for Tier II Account is INR 250.
Things to remember
- You cannot have multiple NPS accounts in your name
- If the minimum investment in any of the accounts is not done in a financial year, the account would freeze. To unfreeze the account you would have to visit the POP through which you invested in the scheme and pay a penalty of INR 100 along with the amount that you want to invest.
How do the investments in the NPS Account grow?
As mentioned earlier, National Pension Scheme is a market-linked retirement scheme which gives you market-linked returns. Let’s understand how these returns are earned –
When you invest in NPS, you have a choice of two investment strategies. You have to choose a strategy based on your risk profile and investment preference. Let’s understand these strategies –
- Active choice –Under the Active Choice, you hold the reins on your investments. This strategy gives you a choice of different investment funds. You can choose any one or a combination of two or more funds. The available funds include the following-
- Asset Class A – whose portfolio is invested in alternative investment funds like REITS, MBS, AIFs, etc.
- Asset class C whose portfolio is invested in fixed interest instruments except for Government securities
- Asset Class E whose at least 50% of the portfolio is invested in stocks
- Asset class G whose portfolio is invested only in Government securities.
Asset Class E has the highest risk and so you cannot choose to invest 100% of your investment in that class. You can invest a maximum of 75% in Asset Class E and rest in Asset Classes C and G in any proportion that you like. Asset Class A is optional. If you choose this fund, the maximum investment would be limited to 5%. Furthermore, under the Active Choice, the investments also depend on age. As you reach 50 years, equity exposure would start reducing. The reduction would be done @ 2.5% every year till your overall equity exposure reaches 50% when you are 60. Thereafter, in older ages, equity exposure would be restricted to 50%.
However, if you do not choose Asset Class E the total investment can either be invested in Asset Class C or G without any investment restrictions.
- Auto choice –The Auto Choice strategy is a readymade strategy where your investments are managed automatically depending on your age. You just have to choose your risk profile from three available options – Aggressive, Moderate and Conservative. Thereafter, your investments would be split into different Asset Classes in the following manner –
- If you choose the Aggressive Risk Profile – Aggressive Life Cycle Fund:
|Age bracket||Asset Class E||Asset Class C||Asset Class G|
|Up to 35 years||75%||10%||15%|
- If you choose a Moderate risk profile – Moderate Life Cycle Fund:
|Age bracket||Asset Class E||Asset Class C||Asset Class G|
|Up to 35 years||50%||30%||20%|
- If you choose a Conservative risk profileConservative Life Cycle Fund:
|Age bracket||Asset Class E||Asset Class C||Asset Class G|
|Up to 35 years||25%||45%||30%|
This is how your investment is initially placed. Then, as you age, equity exposure reduces in all the profiles. This reduction is redistributed between Asset Classes C and G in specific ratios.
You can choose any investment strategy and investment fund. Moreover, you can also switch between the selected strategies and funds. Switching is allowed once every year.
Management of investment funds
The management of the funds invested in the NPS scheme is done by registered fund managers. Currently, there are eight fund managers who are registered with PFRDA to manage NPS investments. They are as follows-
- Reliance Capital Pension Fund
- LIC Pension Fund
- SBI Pension Fund
- ICICI Prudential Pension Fund
- DSP Blackrock Pension Fund Managers
- Kotak Mahindra Pension Fund
- UTI Retirement Solutions Pension Fund
- HDFC Pension Management Company
You can choose any of the above-mentioned fund managers for managing your investments.
Maturity of the National Pension Scheme: Annuity Options available
The NPS scheme matures when you reach 60 years of age. You also have the option to defer the maturity age by 10 years. If you choose this option, your investments would remain invested for another 10 years and the scheme would mature when you reach 70 years of age.
When the scheme matures, you can withdraw 60% of the accumulated amount in a lump sum. From the remaining 40%, you would receive annuity pay-outs. There are different types of annuity pay-outs provided under NPS scheme. These include the following –
- Lifetime annuity at a uniform rate
- A guaranteed annuity which is payable for 5, 10 or 20 years as you choose. Once the guaranteed period is over lifetime annuity would be paid
- Lifetime annuity at a uniform rate and on death the purchase price is returned
- Increasing lifetime annuity which increases at a simple rate of 3%
- Lifetime annuity paid at a uniform rate. In case of death, 50% of the annuity amount would be paid for the lifetime of your spouse
- Lifetime annuity paid at a uniform rate. In case of death, 100% of the annuity amount would be paid for the lifetime of your spouse
- Lifetime annuity paid at a uniform rate. In case of death, 100% of the annuity amount would be paid for the lifetime of your spouse. Moreover, when the spouse also dies, the purchase price would be refunded to the nominee
You can choose any of the annuity payout options and the amount of annuity would depend on the option selected.
If your accumulated fund is below INR 2 lakhs, annuity pay-outs would not be possible. In that case, the entire amount would have to be withdrawn in a lump sum.
Withdrawals from National Pension Scheme:
You can withdraw from the NPS scheme before the scheme reaches maturity. Withdrawals can be done in full or partially. If you choose to withdraw completely, you can avail 20% of the accumulated amount in a lump sum. The remaining would be paid in annuity pay-outs.
Partial withdrawals can be done from the NPS scheme provided the following terms and conditions are met –
- You cannot withdraw more than 25% of the accumulated corpus at once
- Withdrawals would be allowed only from the third year of opening the NPS account
- Withdrawals would be allowed only for special instances. These instances are the same as those in Tier I Account like for meeting marriage related expenses or medical expenses, etc.
- A maximum of three withdrawals are allowed over the entire duration of the scheme
- After one withdrawal there would be a gap of 5 years before the next withdrawal is done
The tax implication of NPS scheme
As mentioned earlier, National Pension Scheme investments give you tax benefits. The investment done, the amount withdrawn and maturity proceeds have different tax implications. Let’s understand these implications in detail –
- Tax implication on NPS investmentWhen you invest in Tier I Account of the NPS scheme, the investment that you do is eligible for deduction from your taxable income. This deduction helps in lowering your taxable income and, consequently, your tax liability. There are multiple deductions which you can claim which include the following –
- Under Section 80 CCD (1)If you are a salaried employee, NPS contribution of up to 10% of your basic salary plus dearness allowance can be claimed as a deduction under this section. For self-employed individuals, the deduction limit is up to 10% of annual income. The maximum deduction that can be claimed under this section is INR 1.5 lakhs which also includes deductions under Section 80C.
- Under Section 80 CCD (2)If you are a salaried employee, NPS contributions done by your employer would also be allowed as a tax-free deduction. Contributions up to 10% of your basic salary and dearness allowance would be allowed as a deduction.
- Under Section 80 CCD (1B)Investment into the NPS scheme, up to INR 50,000 would be allowed as a deduction under Section 80 CCD (1B). This deduction would be available over and above the deductions which you can claim under Section 80C.
Tier II investments, however, do not give you any tax benefits. Those investments form a part of your taxable income and would be taxed at your income tax slab rates.
- Tax implication on the maturity benefitWhen the NPS scheme matures, the 60% lump sum withdrawal is completely tax-free in your hands. Annuity payments from 40% of the corpus would be taxable in your hands at your slab rate as annuities are considered an income.
- Tax implication on closing the scheme before maturityIf you exit from NPS before it matures, 20% of the benefit received in a lump sum would be tax-free. Annuities received from 80% of the corpus would be taxed in your hands.
- Tax implication on partial withdrawalsAny partial withdrawal done from the scheme would be tax-free in your hands provided you withdraw up to 25% of the corpus at any one time.
Benefits of National Pension Scheme:
The Indian Government launched the National Pension Scheme to help individuals create a retirement fund for them. The scheme, therefore, allows you to build up a retirement corpus. Besides this, the NPS scheme has other benefits which include the following:
- Investments into the National Pension Scheme allow you an additional tax benefit of up to INR 50,000. Thus, you can claim a total deduction of up to INR 2 lakhs through 80C investments as well as by investing in the National Pension Scheme. This deduction helps in lowering your tax liability
- Since the NPS scheme gives market-linked returns, you can create an inflation-proof corpus which would give you sufficient funds on retirement
- The investment strategy of NPS is such that equity exposure reduces as you age. This reduction helps in safeguarding the returns which you have earned from the scheme allowing you to build a safe corpus
- The investment amount required for National Pension Scheme is quite low making the scheme accessible to all
So, if you want to create a retirement fund for yourself and also save tax in the process, choose the National Pension Scheme. The scheme would help you build a good corpus with market-linked returns and also promise lifelong income through annuities.
Frequently Asked Questions
- What would happen to my investments if I die before maturity?In case of death, your nominee can withdraw the accumulated corpus from the NPS scheme in one lump sum. This withdrawal would be tax-free in the hands of the nominee.
- What is PRAN?PRAN stands for Permanent Retirement Account Number. This number is associated with your NPS account. In other words, your NPS account is identified through your PRAN number. The number can be used for making contributions or for withdrawals.
- Who pays annuities under NPS scheme?There are specific insurance companies who can pay annuities under the NPS scheme. You can choose any company as per your preference. The companies are as follows –
- Reliance Life Insurance Company Limited
- Bajaj Allianz Life Insurance Company Limited
- Life Insurance Corporation of India
- ICICI Prudential Life Insurance Company Limited
- HDFC Standard Life Insurance Company Limited
- Star Union Dai-ichi Life Insurance Company Limited
- SBI Life Insurance Company Limited
- Are any documents required for making withdrawals from the scheme?Yes, if you want to withdraw from the scheme you would have to submit some documents which include your PRAN card, cancelled cheque of your bank account and attested copies of your identity proof and address proof.