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Last Updated : Jul 17, 2019 04:45 PM IST | Source: Moneycontrol.com

Want money after retirement? Here’s how National Pension Scheme will help

National Pension Scheme or NPS is a government funding scheme who are looking to invest for their retirement days. Click here to know all about the NPS scheme.

The National Pension Scheme or NPS is a government-sponsored social security scheme available to all Indians seeking a low-risk investment mode for their retirement days. According to the scheme, an investor makes deposits in the NPS account regularly. Upon retirement, the investor can withdraw a part of the accrued funds. The rest is doled out to the investor as monthly pension.

The NPS had been initially launched by the Pension Fund Regulatory and Development Authority (PFRDA) for government employees but is now available to all Indians, including NRIs on a voluntary basis. It is primarily a long-term investment plan for those planning to secure their future. As the name suggests, investments mature when the account holder is 60 years old.

The NPS scheme is available to everyone, including salaried employees and those working in the unorganised sector. NPS accounts are of two types—Tier I and Tier II. The Tier I account is the default pension account created for everyone opting for the NPS scheme. One has to open the Tier I account with a minimum of Rs500. This account offers a tax benefit to the account holder. A Tier II account has to be created by the investor voluntarily with a payment of Rs250 only. This account does not offer tax benefits.


Investments in the scheme up to Rs 2 lakh are eligible for tax deductions. While investments up to Rs1.5 lakh are eligible for deductions under section 80(C) of Income Tax Act, an additional contribution of Rs50,000 can be claimed as NPS tax benefit.

Up to 50 per cent of the contribution in NPS is invested. It can either be invested as equity, corporate debt, government securities or other investment funds. Under the NPS scheme, the investor will have the option to choose where the money is invested by designing his/ her portfolio or opt for an automatic allotment and investment of funds.


Who should invest in NPS

The NPS is a safe, low-risk investment option for anyone who wants to plan for a secure post-retirement life. The scheme is available to both salaried employees working in the private sector to those working in the unorganised sector.

Consider the scheme as a kitty where you can make deposits regularly to save a part of your income for the future. Now, this kitty not only allows the investor to make regular deposits but invests your funds in equities. So you also gain high returns on your savings.

Now, this scheme also does not allow you to withdraw your entire corpus upon retirement. It mandates you to set aside at least 40 per cent of your funds. This will be given to you in the form of monthly pensions. A regular source of income upon retirement is an added benefit in the scheme if you want to secure your future.

The scheme is meant for anyone with a low-risk appetite who wants to be prepared for his/ her old age. The scheme is also ideal for people looking to invest in schemes for tax-saving purposes. It is one of the few government-sponsored schemes that offer maximum tax benefits. Investments up to Rs2 lakh are eligible for tax deductions, unlike others where investments up to Rs1.5 lakh are eligible for deduction.


Features and benefits of NPS

As explained, the NPS is a low-risk investment option. It offers good returns and tax benefits. A portion of the investment is invested in equity, corporate debt, government securities or other investment funds. Therefore returns in NPS are higher than other schemes.

For the benefit of the investor, the scheme lets the investor choose between an Active Choice and an Auto Choice. Under the Active Choice, the investor will be in control of where his/ her money is invested. Investors can design their own portfolio and decide which areas to invest in. The scheme does not allow investors to hold multiple or joint accounts.

The Auto Choice is for people who do not want to concern themselves with how their money is being invested. They allow ‘fund managers’ to manage their funds. Currently, there are eight NPS fund managers—HDFC Pension Fund, Birla Sun Life Pension Scheme, ICICI Prudential Pension Fund, LIC Pension Fund, SBI Pension Fund, Kotak Pension Fund, Reliance Capital Pension Fund and UTI Retirements Solutions. Their managers manage the entire NPS corpus. The investor can track the performance of each of these fund managers. If dissatisfied with the performance, the investor can change the fund manager.

To limit the risk factor in NPS, the PFRDA has capped the maximum limit of equities to 50 per cent. That means only up to 50 per cent of your investment can be invested in equities and other funds. The other half of your fund will be completely safe from market risks.

Investments in NPS are eligible for tax deductions. If done properly, tax benefits can be gained for investments up to Rs2 lakh. Investments up to Rs1.5 lakh are eligible for tax deductions under section 80 C of the IT Act. Section 80CCD (1) covers contribution made by the investor and 80CCD (2) covers the contribution of the employer. An additional contribution of up to Rs50,000 can be claimed as an NPS tax benefit.

The investment account will mature when the investor turns 60 years old. Upon attaining the age, the investor can withdraw a part of the total corpus. The PFRDA does not allow complete withdrawal of NPS account. At least 40 per cent of the amount has to be left in the NPS account. This will be given out to the investor as monthly pension. The scheme also allows for premature withdrawal only after three years from the opening of the account fr Tier II accounts. Up to 25 per cent can be withdrawn for paying medical bills, your child’s education or marriage, purchasing a house.

In case you decide to withdraw at any time before 60 years, you have to invest at least 80 per cent of the funds to buy a life annuity from any government regulated life insurance company.


Types of NPS accounts

There are two kinds of NPS accounts—Tier I and Tier II. The Tier I account is a default one and is created for everybody who opts for the NPS scheme. Tier II account has to be created voluntarily by the investor.

The Tier I is a retirement account, but Tier II is a non-retirement account. A Tier II account can be created only if there is an existing Tier I account. The Tier II account has more flexibility than the Tier II account.

A Tier II account can be created at any point in time and can be closed, too. Except for government employees, who have a lock-in period of three years, there is no lock-in period for Tier II accounts. For the creation of a Tier I account, one has to make a minimum contribution of Rs500. The minimum contribution for a Tier II account is Rs250.

For Tier, I accounts, withdrawals are permitted only upon maturity when the investor turns 60 years old. The entire amount cannot be withdrawn from a Tier I account. In the Tier II account, withdrawals are permitted at any time. It is also mandatory to have a bank account in order to open a Tier II account. However, there is no such mandate in a Tier I account.

Funds can only be transferred from Tier II to Tier I account and not otherwise. Tier II account does not provide tax benefits but Tier I account does. Moreover, returns on the Tier II account are taxable. In the case of Tier I accounts, however, returns are tax-free.

The funds in both Tier I and Tier II accounts are invested in the same fashion. Up to 50 per cent of the funds is invested in equity, corporate debt, government securities or other investment funds. There is no fixed rate of interest.

Although Tier II is more flexible, it is still a long-term investment option. Since it is an equity-oriented hybrid scheme, that caps the equity exposure to 50 per cent, the returns are not as high as other pure equity schemes. Moreover, a minimum balance of Rs2,000 has to be maintained in a Tier II account at all times. 


Eligibility for opening an NPS account

All Indian citizens are eligible for opening an NPS account. The investor should be between 18 and 60 years of age at the time of opening the account. The investor should have complied with the KYC norms.

The prospective investor should have a PAN, Aadhaar linked to a bank account and most importantly a bank account that has net banking enabled.

All central government employees are mandatorily covered under the NPS. Various state governments have also adopted the NPS architecture or implemented NPS for their employees. The design may be different for each state. If you are a state government employee, you can check the status of your state by visiting the eNPS portal.

For subscribers of NPS, who are working under central or state governments, they can also approach their HR department or accounting department to get details of the scheme.

The scheme is available to salaried employees working in private sectors, government employees as well as those working in unorganised sectors. Unlike many government-sponsored schemes, this one is applicable to non-resident Indians, too.

The account created can be transferred across geographies and employers. Multiple NPS accounts cannot be held by an investor. Joint accounts cannot be held either.


How to calculate NPS returns

Banks and fund managers provide for an NPS calculator tool wherein you will be able to know how much pension and lump sum amount will be available to you when you retire.

However, before using the calculator, you should know how the calculation works. The predictions of the calculator will be primarily based on your monthly NPS contribution as well as your age. The prediction will also take into account the period for which you will be investing and the returns you are expecting on the contributions. It will also ask you to enter the percentage you will leave as an annuity upon maturity. It has to be at least 40 per cent, according to government rules.

Since the rate of interest in NPS is not fixed, the calculator will ask you to enter your expected rate of interest. While this rate cannot be guessed or predicted exactly, you may consider the fact that over the one decade since its inception, the NPS has yielded returns between 8 to 10 per cent.

The amount you enter as your monthly contribution will be taken into account for the calculation of the principal amount invested from today until you are 60. This principal will be compounded annually. So the principal amount and the returns will form the total balance available to you when you are 60. Of this, annuity will be deducted based on the percentage you define. The remaining amount will be available to you for lump sum withdrawal. The annuity amount will be given to you as a monthly pension.

For example, let us consider an investor who is 35 years old and has 25 years to go before retirement. The investor is making a monthly contribution of Rs2,000 and is expecting returns at a rate of 8 per cent. The principal amount invested would be Rs6,00,000 (2,000 x 12 x 25). The interest earned is 12,98,372 (compounded annually at 8 per cent). Total pension wealth generated is Rs18,93,372 (principal + interest). Now if the investor decides to invest 50 per cent of this in an annuity, the lump sum available for withdrawal is Rs9,49,186. The pension he will receive per month is Rs6,327. 


How to open an NPS account

There are two ways of opening an NPS account. One can choose to open an account online or do it offline. The online way is simpler and faster.

Before you begin, make sure you have PAN details, mobile phone, email id and an active bank account in any of the 17 banks registered in the NSDL. The account should have the net banking facility.

Once you have these in order, visit the NPS website and begin the registration process. Fill in your details. Fill in a virtual ID and generate an OTP on your phone and email. After verifying, fill in your personal details, save and proceed. Then fill in your bank details. In the next step, you can design your portfolio. You can decide how much of your funds are being invested in the four categories of investments available. Or you can choose the auto mode.

Once you have completed that, you can fill up information about your nominee. Then upload a photograph, a cancelled cheque and your signature. Once the paperwork is done, you have to make your first contribution. It has to be at least Rs500. Upon completion of this process, a Permanent Retirement Account Number (PRAN) is generated. Keep your PRAN handy for your future transactions. You can digitally sign for your contribution by verifying your Aadhaar details.

In case you decide to print and sign it, send the signed form to the processing centre of eNPS within 90 days of allotment of making the payment.

For an offline creation of account, there are entities called Point of Presence (PoP) appointed by the PFRDA. These PoPs help individual investors set up their NPS account. To locate your nearest PoP, you can visit NSDL website. PoPs are usually located in banks and help investors open and account, make contributions to their account and design their portfolio.



What is an NPS?

The National Pension Scheme is a government-sponsored scheme meant to encourage people to save for their retirement. It is a low-risk scheme and is available to all Indian citizens, including NRIs.

Under the NPS, an investor saves a certain amount of the salary by putting it in an NPS account. A portion of the amount is then invested in four categories of investments including equities, corporate debt, government securities or other investment funds. This cannot exceed 50 per cent of the total amount.

There is no fixed rate of interest. Returns depend on how well the investments perform. The investor can choose to make modifications to the investments, if he/ she is not happy with their performance.

Not only does NPS offer high returns but also gives tax benefits to account holders. The scheme offers tax benefits for deposits up to Rs2 lakh (up to Rs1.5 lakh under section 80 (C) of IT Act and additional Rs50,000 as NPS tax benefit).

The funds can be withdrawn only upon maturity, i.e, when the investor turns 60 years old. Then, too, the investor cannot withdraw the entire amount. At least 40 per cent is spent on annuity. This is given out as monthly pension. The remaining can be withdrawn as a lump sum.

How does NPS account work?

The NPS account does not have a defined rate of interest. So a part of the contributions made by the investor are further invested in equities, government securities, corporate debt and other investment funds.

The investor can choose to design his/ her own portfolio or let fund managers decide how the funds are invested. The investor can have a say in where his/ her funds are being invested. Or the funds can be managed by a fund manager who decides what percentage of the funds is invested where. Either way, the investor will have the option to track the investments. If he/ she is not happy with the way the investments perform, he/ she can make modifications to the investments or seek to change the fund manager.

The returns will be accumulated in the NPS account. The funds (principal + interest) will be available to the investor when he/ she turns 60. Only a part of the funds will be available for withdrawal. The rest will be doled out to the investor as an equal monthly pension.

How is NPS different from APY?

Both the National Pension Scheme and Atal Pension Yojana are government-backed pension schemes meant for people planning to secure their post-retirement days.

However, while the NPS is open to all Indians, including NRIs, the APY is aimed specifically at people working in unorganised sectors. In the APY, monthly contributions have to be made to the account for at least 20 years to be able to get pension upon attaining the age of 60.

Anybody who is above 18 years of age can opt for both schemes. But while APY offers a defined rate of interest (currently 8 per cent), the NPS doesn’t have a defined interest. In APY, contributions are stacked up in the account and interest accrued. When the person retires, she/ he becomes eligible for a pension. In NPS, however, a part of the contributions is invested in equities, corporate debt, government securities or other investment funds. Upon retirement, a part of the funds is available for withdrawal in a lumpsum. The rest is divided into equal monthly pensions.

Who can invest in NPS?

Any person who wishes to save money for post-retirement days can make investments in NPS. Any salaried person, who wishes to get tax benefits, can also invest in NPS.

What is the rate of interest of NPS?

There is no fixed rate of interest in NPS. The NPS contributions are broken down, and a part of it invested in equities. These investments, depending on how the market performs, yield returns for the investor. So far, in the ten years of its existence, the NPS has shown returns at the rate of 8 to 10 per cent.

Can I open an NPS jointly with my spouse or on behalf of my minor child? 

No, The NPS does not allow a single investor to hold multiple accounts. It also does not allow you to hold joint accounts with anyone. Under the scheme, every individual must have a single NPS. Moreover, the scheme is available for people above the age of 18 only. So minors will not be able to hold an NPS account in any form.

Can an NRI hold an NPS account?

Yes, NRIs can hold an NPS account. According to NSDL, contributions made by NRIs will be subject to regulatory requirements of RBI and FEMA. However, overseas citizens of India, persons of Indian Origin and Hindu-Unified Families cannot invest in NPS.
First Published on Jul 16, 2019 04:22 pm