Month: January 2020

Retirement is called the golden phase of your life as you are free from financial responsibilities and you can live out your life doing whatever you want. However, to make your retirement a golden phase you need to prepare for it in advance. When you retire, your income flow stops. However, the expenses continue and so it is essential that you have a retirement corpus at your disposal to meet such expenses. That is why many of you invest in retirement oriented avenues with a view to creating a substantial retirement corpus for your older ages. One such avenue is the National Pension Scheme (NPS) which was launched by the Government to offer investors a tax saving investment avenue. Ever since its launch, NPS has become quite popular. If you too are thinking of putting your money in NPS investment scheme, here’s a complete guide to the scheme and the best way to invest in it.

What is the National Pension Scheme?

National Pension Scheme is a retirement oriented investment scheme launched by the Indian Government. You can invest in the scheme when you are working and have a regular source of investment. Then, when you retire, the scheme would offer you a corpus to meet your retirement-related expenses. The corpus can be availed partly in a lump sum and partly in annuity pay-outs which give you a regular source of income even after retirement.

Types of NPS investments

When you choose to do NPS investment, there would be two accounts to choose from. One is a mandatory account which you have to choose and the other one is optional. You can invest only in the mandatory account or in both. The accounts are as follows –

1. Tier I Account
   Tier I Account is the compulsory account into which you would have to invest. When you register for NPS investment, the minimum investment into Tier I Account is INR 500. Moreover, in a financial year, you would have to contribute at least INR 1000 in the account. Investments are done in Tier I account are not permitted for partial withdrawals till you reach 60 years of age. However, to allow liquidity in times of need, there are instances in which withdrawals are allowed. Such instances are as follows:
   1. If you remain continuously unemployed for 60 days or above
   2. If you have to bear marriage related expenses
   3. In case of medical emergencies
   4. If you want to buy a house, etc.
2. Tier II Account
   As mentioned earlier, the Tier II account is a voluntary account which you might or might not choose for NPS investment. This account gives you the flexibility of easy withdrawals any time that you want. However, you can open this account only when you already have a Tier I account in your name. The minimum investment for Tier II Account is INR 250. You can open these investment accounts only once. Multiple accounts are not allowed. Moreover, if the specified minimum investment is not done in any account, the account is frozen. To unfreeze the account you would have to visit a POP and make a contribution towards the scheme along with a penalty of INR 100.

How do NPS investments work?

NPS allows you to earn market-linked returns since the accounts invest your money in securities of the capital market. When you invest, you would be given a choice of two investment options. Each option has a particular investment strategy and you can choose to invest as per either of the available options. The options are as follows –

1. Active choice
   As the name suggests, Active choice is when you want to manage your investments yourself. There are four types of investment funds to choose from. Each fund has different types of portfolio and risk profile. You can choose to invest in one fund or multiple funds. The available funds include the following –
   1. Asset Class E where 50% of the portfolio consists of stocks
   2. Asset class C where the portfolio has fixed interest instruments. However, these instruments do not include Government securities
   3. Asset class G where the portfolio only contains Government securities
   4. Asset Class A – where the portfolio contains alternate investment funds like REITS, MBS, AIFs, etc.

   You cannot invest 100% of your investment in Asset Class E. The maximum NPS investment into Asset Class E is restricted to 75% while the remaining can be invested in Asset Classes C and G. Asset Class A is optional and if you choose it the investment is limited to 5%. The investment also depends on your age. After reaching 50 years of age the equity exposure reduces by 2.5% every year till it reaches 50% after 10 years. Thereafter, equity exposure in Asset Class E is restricted to 50%. Investments in Asset Class C or Asset Class G, on the other hand, can be done without any limitations.

2. Auto choice
   If you don’t know how to handle your investments yourself for maximum returns and minimum risk, you can choose Auto Choice. Under this choice, the investments are managed pre-defined manner which has been specified by the PFRDA. Your investment is split into three different asset classes depending on your age and the risk profile that you select. There are three risk profiles which are Aggressive, Moderate and Conservative. Based on the profile that you choose and your age, here’s how your NPS investment is split –
   1. LC75 – Aggressive Life Cycle Fund
      

      Age	Asset Class E	Asset Class C	Asset Class G
      Up to 35 years	75%	10%	15%

   2. LC50 – Moderate Life Cycle Fund
      

      Age	Asset Class E	Asset Class C	Asset Class G
      Up to 35 years	50%	30%	20%

   3. LC25 – Conservative Life Cycle Fund
      

      Age	Asset Class E	Asset Class C	Asset Class G
      Up to 35 years	25%	45%	30%

   Thereafter, with increasing age, investment in Asset Class E is reduced and investments in the other two classes are increased every year. You can also change your investment strategy from Active Choice to Auto Choice and vice-versa. Changes in Asset Class are also allowed. However, any change that you do is allowed only once a year.

How to invest in NPS?

NPS investment can be done online as well as offline. Let’s understand both the processes in details –

1. Investing offline
   To invest offline, you would have to locate a Point of Presence (POP). A POP is a financial institution which is registered to open an NPS scheme. Most banks and other non-banking financial institutions have registered themselves as POPs for NPS investments and you can choose to invest through them. Each POP has an authorized branch from where you can invest in the scheme. These branches are called Point of Presence Service Providers or POP-SPs. You can approach any POP-SP, deposit your investment and your NPS investment account would be opened. To find the list of POP-SP you can check the website of the Pension Fund Regulatory and Development Authority (PFRDA) https://www.npscra.nsdl.co.in/pop-sp.php. PFRDA is the body which regulates and governs the NPS scheme
2. Investing online
   Locating a POP-SP can prove to be time-consuming and so the online mode of NPS investment is also available. To invest online, you can follow the below-mentioned steps –
   1. Log onto the website of the scheme which is: https://enps.nsdl.com/eNPS/NationalPensionSystem.html
   2. On the home page, choose the ‘National Pension Scheme’
   3. You would then be asked to register yourself before you can contribute towards the scheme
   4. To register, provide the details asked in the online registration form. These details include the type of investor, citizenship, bank account through which you want to contribute and your PAN card number
   5. Then you would have to provide your personal and family details like name, age, address, etc.
   6. An acknowledgement number would be generated
   7. You would be able to register yourself and generate your Permanent Retirement Account Number (PRAN) which would be the number of your NPS account
   8. You would have to e-sign the registration form to complete registration
   9. Once you are registered, you can contribute towards the NPS scheme by providing the PRAN number, the account to which the contribution is to be made and the amount that you would like to contribute

Once these steps are taken, you would be able to do NPS investments online.

Documents required to apply for NPS investment

Whether you apply online or offline, the following documents would be required to be submitted to open your NPS account –

1. The filled Registration Form
2. Proof of identity
3. Proof of age
4. Proof of address
5. PAN Card
6. Aadhar Card
7. Passport-size photographs

Eligibility parameters for NPS investment

To be able to invest in the National Pension Scheme, you should fulfil the following eligibility parameters:

1. You should be an Indian citizen
2. If you are an NRI you can also invest in the scheme. However, if your citizenship status changes after you have invested, the scheme would be closed for you
3. You should be aged between 18 years and 60 years

Benefits of NPS investments

NPS investments are favoured by many because of the benefits that these investments provide. Let’s assess what these benefits are –

1. NPS investments give you additional tax-saving benefits. 10% of your salary or annual income can be contributed towards the NPS scheme to claim a tax deduction under Section 80CCD (1). You can claim a maximum deduction of up to INR 1.5 lakhs under this Section. Moreover, you can invest an additional amount of up to INR 50,000 to claim an additional deduction under Section 80 CCD (1B). This deduction is available over and above Section 80C and Section 80 CCD (1) limit of INR 1.5 lakhs. If you are a salaried employee and your employer also contributes towards NPS investments, the employer’s contributions would also be allowed as an additional deduction under Section 80 CCD (2) up to 10% of your salary. This tax advantage of NPS investments makes them popular among individuals looking to lower their tax liability.
2. You can withdraw 60% of your corpus in a lump sum when the scheme matures. This lump sum withdrawal is also tax-free
3. NPS investment promises you annuity payments which create a series of regular income after you retire
4. The scheme’s minimum contribution requirement is low and affordable making it suitable for all types of investors
5. The scheme invests in the market which gives you inflation-adjusted returns to fulfil your financial goals

NPS investments vis-à-vis other investment avenues

NPS is often compared with other popular investment avenues which are available for retirement planning. So, here’s a comparative analysis between NPS investments and other popular avenues –

So, understand how to invest in NPS and the way the investment works before you invest so that you know exactly what to expect from the scheme.