One of the most important aspects of financial planning is to create a retirement corpus. This retirement corpus not only allows individuals to meet their expenses at the time of retirement but also helps them sail through post-retirement life without much hassle.
Taking into consideration the above, the Indian Government launched the National Pension System or NPS in 2004 under the regulatory authority Pension Fund Regulatory and Development Authority of India (PFRDA). The scheme allows for systematic savings during one’s working tenure and helping in financial discipline among individuals to save for the future.
What is NPS?
The National Pension Scheme also known as National Pension System (NPS) is open to all the employees from public sector, private sector and also unorganized sector. The contribution of investors is invested in market-linked debt/equity/alternate asset class and returns depend on the performance of these investments. The National Pension Scheme is an example of a defined contribution plan.
Features of NPS
Two Different Account Types
Contributions to National Pension Scheme can be made in two buckets, Tier 1 Account and Tier II Account.
Tier I is the main retirement account and acts as a pension account and withdrawals from it are subject to specific restrictions.
Tier-II accounts are voluntary accounts providing liquidity of funds via investments and withdrawal. Tier II Account can only be opened by Tier I subscribers. The table below shows the details for both account type:
Fund Managers
The money is managed by seven fund managers appointed by PFRDA. The government employees accounts are managed by one of the three fund managers on default basis i.e. LIC Pension Plan, SBI Pension Plan and UTI Pension Plan. However, they can opt for other fund managers.
The money invested by others are managed by one of the six fund managers i.e. ICICI Prudential Pension, Birla Sunlife Pension Management, Kotak Mahindra Pension, HDFC Pension Management, SBI Pension Fund and UTI Retirement Solutions.
Asset Class
Following are the assets classes available for investment under NPS:
Equity or ‘E’ – A ‘high return-high risk’ fund that invests pre-dominantly in equity market instruments
Corporate Debt or ‘C’ – A ‘medium return-medium risk’ fund that invests pre-dominantly in fixed income bearing instruments
Government Securities or ‘G’ – A ‘low return-low risk’ fund that invests purely in Government Securities
Alternative Investment Funds or ‘A’ –In this asset class, investments are being made in instruments like CMBS, MBS, REITS, AIFs, InvITs etc.
Investment Options
Subscribers can opt for either of the following two investment options:
Auto choice:
It is available as a default option for subscribers as per the system. Fund investments under this option are managed automatically by an appointed fund manager as per an investor’s age profile.
Active Choice:
Under this option, individuals are free to decide among available asset classes in which they would prefer to invest their funds. Also, they can allocate different percentages of contributed funds to be invested in with a maximum permitted equity allocation; which is 75% for people under the age of 50 years. Thereafter, it goes down by 2.5% every year till it reaches 50% at 60 years. Also, not more than 5% can be allocated in alternative investment funds and total allocation to E, C, G, A should be 100%.
Subscribers also have an option to switch their investment options as well as change their fund manager. These options are, however, subject to certain constraints. This option is available to non-government fund investors.
Various Scheme Options
There are various scheme options available to both government and non-government investors.
In case of government investors, the following scheme options are available:
- Default Scheme: In the default scheme, the contribution is allocated to three Pension Fund Managers (PFM) viz. SBI Pension Funds Private Limited, UTI Retirement Solutions Limited and LIC Pension Fund Limited in a predefined proportion and each of the PFMs invest the funds in the proportion of 85% in fixed income instruments and 15% in equity and equity related instruments.
- Scheme G: 100% investment is made in government securities
- Lifecycle fund for Auto Choice:
LC 25 scheme– This life cycle fund provides a cap of 25% of the total assets for Equity investment. The exposure in Equity Investments starts with 25% till 35 years of age and gradually reduces as per the age of the Subscriber.
LC 50 scheme – This life cycle fund provides a cap of 50% of the total assets for Equity investment. The exposure in Equity Investments starts with 50% till 35 years of age and gradually reduces as per the age of the Subscriber.
For a subscriber other than government employees, the following schemes are available:
Life Cycle Fund for Auto Choice:
LC 75 scheme – Aggressive Life Cycle Fund: This Life cycle fund provides a cap of 75% of the total assets for Equity investment. The exposure in Equity Investments starts with 75% till 35 years of age and gradually reduces as per the age of the Subscriber.
LC 50 scheme – Moderate Life Cycle Fund: This Life cycle fund provides a cap of 50% of the total assets for Equity investment. The exposure in Equity Investments starts with 50% till 35 years of age and gradually reduces as per the age of the Subscriber.
LC 25 scheme– Conservative Life Cycle Fund: This Life cycle fund provides a cap of 25% of the total assets for Equity investment. The exposure in Equity Investments starts with 25% till 35 years of age and gradually reduces as per the age of the Subscriber.
Tax Benefit
Three section cover the tax deductions available for contributions in National Pension Scheme:
Section 80 CCD(1): Contribution made by Government Sector Subscriber, Non-Government Sector Subscriber come in overall deduction cap of INR 1,50,000
Section 80CCD(1B): In addition to deductions u/s 80CCD(1), subscribers are allowed an additional deduction of up to INR 50,000 towards contribution to Tier-I account.
Section 80CCD(2): Employers contribution, also gets tax benefit up to 10% of salary for non-government sector employee and 14% for government sector employee. However, from 01st April’2021, the employer’s contribution in excess of INR 7,50,000 will be treated as perquisite and will be added to salary of the subscriber and taxed at slab rate.
Other tax benefits are: Up to 25% of Tier I contributions withdrawn by a subscriber are exempt from tax and Lump-sum withdrawal of up to 40% of an NPS corpus after a subscriber turns 60 is exempt from tax.
Withdrawal Provisions
The withdrawal of the accumulated fund from NPS account is allowed at the age of 60, however premature withdrawal can take place in certain conditions.
In case of maturity of the scheme at the age of 60, the subscriber can withdraw 60% of the accumulated corpus and rest 40% of the accumulated amount is used to purchase annuity.
In case of withdrawals before 60 years, partial withdrawal can take place after completion of 3 years from date of opening account. The subscribers can withdraw only up to 25% of the total contribution made. Pre mature withdrawals is only applicable in case of specific circumstances like sponsoring a child’s education, purchasing a house, setting up a business or any medical emergency. The subscribers can withdraw up to 3 times in intervals of 5 years in the scheme’s entire tenure.
Summing Up
With numerous benefits provided by NPS like stable returns, helping in retirement planning, tax benefits, flexibility, regulated and small investment ticket size, NPS is a recommended investment avenue for investors in the age bracket of 18-60 years. The following caveat should always be taken into consideration before investing: “Soch Kar, Samajh Kar, Invest Kar”.
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