The National Pension System, or NPS, has been in the news throughout this year, thanks to the number of changes introduced by the Pension Funds Regulatory and Development Authority (PFRDA).
The awareness around NPS as a retirement avenue is rising, as is evident in the expanding subscriber base. Even though it’s a retirement planning scheme, it offers subscribers the option to invest for their other goals, too. They can do so through the Tier-II, or investment account.
What are the types of accounts that can be opened under NPS?
You can open a tier-I (retirement) and a tier-II (investment) account. The latter is optional and can be opened only if you already have a tier-I account, which is the default pension account. Contributions to this primary account carry tax benefits under sections 80CCD (1), 80CCD (1B) and 80CCD (2). Your contributions to this account are eligible for tax benefits up to the overall 80C limit of Rs 1.5 lakh, while additional contribution of up to Rs 50,000 can be claimed as deduction under 80 CCD (1B). Section 80CCD (2) comes into play if your employer contributes to your NPS account – up to 10 percent of your basic salary and dearness allowance is allowed as deduction from your total income. On the other hand, contributions to Tier-II will yield no tax breaks.
Why should I open an investment account when I already have Tier-I with NPS?
Since tier-I is a retirement account, it comes with several restrictions – the purpose is to ensure that you do not dip into the corpus for other goals. For one, you cannot withdraw the amount you invest until you turn 60. Even then, you can withdraw up to 60 percent as lump-sum, while the balance will have to be converted into annuities. Now, annuity income is taxable. Partial withdrawals are not allowed except in certain exceptional circumstances. So, you can withdraw up to 25 percent of your contributions in case you need to fund your children’s higher education, purchase or construction of a house and treatment of critical illnesses. In case of premature withdrawal due to any other reason, you will get access to only 20 percent of your corpus, the balance 80 percent will have to be used to purchase annuities.
Tier-II is free from all these restrictions and, therefore, can be used to build a kitty for other long-term goals. However, there are a few conditions that you have to fulfil. For one, there can be no Tier-II without Tier-I. And, you need to invest at least Rs 1000 to start with, and a minimum of Rs 250 annually. Beyond this, you are free to invest and withdraw at will.
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What are the charges associated with the two accounts?
There is no difference in the charge structures for the both the account categories. Registration will cost Rs 200, while you will have to pay 0.10-0.25 percent of the contribution amount as service charges. If you choose the physical route to make the contributions, the maximum charge cap will be Rs 25,000. In case you choose the virtual, eNPS mode, the maximum fee will be limited to Rs 10,000. Then, there is the investment management fees of 0.03-0.09 percent. The central record keeping agencies – Karvy and NSDL – will charge Rs 39.36-Rs 40 as account opening fees and Rs 57.63-Rs 95 as account maintenance charges. NPS Trust’s fees will amount to 0.005 percent of assets managed per annum, while custodian asset servicing charges will be 0.0032 percent per annum.
Why should I open an investment account under NPS when I can invest in mutual funds?As mentioned earlier, it is not mandatory to open a Tier-II account. However, it does come with several benefits, foremost among them being the charge structure, which is amongst the lowest in the world. For instance, the maximum fund management fee for NPS schemes E (equity) is 0.09 percent per annum, which is far lower than what even direct equity mutual funds levy (0.3-1 percent). These apart, you can switch between pension fund managers without attracting capital gains tax, unlike with mutual funds.