NPS

National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to instil the habit of saving for retirement. Under the NPS, your savings will be invested in a pension fund by Pension Funds Regulatory and Development Authority (PFRDA) regulated professional fund managers with the approved investment guidelines. The portfolio will be diversified, comprising of government bonds, bills, corporate debentures and shares.

Salient Features and Benefits of NPS

NPS offers wide range of benefits to individuals, making it a unique investment opportunity. Some of the salient features of NPS are

  • Portable Account – the NPS account (PRAN) remains the same irrespective of change of employment or geography.

  • Online platform – On joining NPS, each Subscriber gets log in ID and Password of NSDL system for accessing NPS details online.

  • It offers choice of Service Providers, Funds, Investment Options, Pension Fund Manages, Annuity Service Provides and Annuity Plans to Subscribers

  • It offers Subscribers freedom to switch the Service Provider, Fund, Investment Option and Pension Fund Manager

  • Flexible contribution mechanism – Amount and frequency of contribution can be changed as per the Subscriber requirement

  • Prudently regulated – NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust

  • Efficient grievance management through CRA / PFRDA Website, Call Center, Email or Postal Mail

  • Transparent investment norms – Investment Portfolio under each asset class can be viewed on respective Pension Fund Manager’s website.

  • Extremely Low Cost of operations – with 0.01% as Fund Management Charge, NPS is one of the World’s least cost investment options

Tax Benefits and Treatment

Tax benefits under Tier I and Tier II Account are as per below table

NPS Account

Tax Benefit

Tax Treatment

Tier I

Salaried Individual

  • Investment up to 10% of Salary (Basic + Dearness Allowance) is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to 1.5 lakhs limit of section 80C

  • Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961

Self Employed Professionals

  • Investment up to 10% of Gross Annual Income is deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to 1.5 lakhs limit of section 80C

  • Additionally, investment up to Rs.50,000 is deductible from taxable income u/s 80CCD (1B) of Income Tax Act, 1961

  • Up to 40% of Corpus withdrawn in lump sum is exempt from tax

  • Balance amount invested in Annuity is also fully exempt from tax

  • Pension received out of investment in Annuity is treated as income and will be taxed appropriately

Tier II

There is no tax benefit on investment towards Tier II NPS Account

Indexation benefit can be claimed

Difference between Tier I & Tier II A/c

Tier I NPS Account

Tier II NPS Account

It is also known as Pension account

It is known as investment account

Withdrawal from this account is permitted after 10 years of account opening or attaining the age 60 years whichever comes early

Withdrawal from this account can be done at any point of time as per Subscriber’s need

Minimum annual contribution required for this account is Rs.6,000

 

 

Investment of Funds under NPS

Subscriber gets the choice of 3 funds under NPS – Equity, Corporate Bonds and Government Securities. These are also known as E, C and G respectively.

Subscriber gets the freedom to decide her own asset mix restricting the exposure to Equity to 50% of Contribution amount. It is called Active Choice Investment option. Subscriber also gets an option of Life Cycle Fund which is also known as Auto Choice. Under this mode, investment across three funds is done as per the age of the employee as shown in below chart

Age of the
Employee

Equity

Corporate
Bonds

Government
Securities

< = 35 Yrs

50%

30%

20%

36

48%

29%

23%

37

46%

28%

26%

38

44%

27%

29%

39

42%

26%

32%

40

40%

25%

35%

41

38%

24%

38%

42

36%

23%

41%

43

34%

22%

44%

44

32%

21%

47%

45

30%

20%

50%

46

28%

19%

53%

47

26%

18%

56%

48

24%

17%

59%

49

22%

16%

62%

50

20%

15%

65%

51

18%

14%

68%

52

16%

13%

71%

53

14%

12%

74%

54

12%

11%

77%

> = 55 Yrs

10%

10%

80%

The re-alignment of portfolio under Auto Choice is system driven and is exercised on the date of birth of the Subscriber.

Following flexibilities are given to Subscribers:

  • Subscriber can have different Investment Choice (Auto / Active) for Tier I and Tier II account

  • Subscriber can change the Asset Mix and Investment Choice once in a Financial year for both Tier I and Tier II account

Exit from the Scheme

Subscriber can exit from the Scheme after 10 years of account opening or on attainment of the age 60 years. The payout will be defined as per the exit age of the Subscriber.

Exit before the age 60 years

Exit at the age 60 years

  • Up to 20% of Corpus can be withdrawn in lump sum

  • Balance amount needs to be invested in Annuity

  • Up to 60% of Corpus can be withdrawn in lump sum

  • Balance amount needs to be invested in Annuity

If the Corpus is less than or equal to Rs.1 lakh, there is no need to invest into Annuity. Entire amount can be withdrawn in lump sum

If the Corpus is less than or equal to Rs.2 lakhs, there is no need to invest into Annuity. Entire amount can be withdrawn in lump sum

Subscriber exiting from NPS at the age of 60 gets following flexibilities

  • Subscriber can defer the decision to invest in Annuity for 3 years.

  • Subscriber can defer the decision of lump sum withdrawal for 10 years.

  • Lump sum amount due for withdrawal at the age 60 can be withdrawn in 10 installments as per the choice of the Subscriber.

  • If Subscriber does not want to exit at the age of 60 years, she can keep on contributing towards NPS till the age 70 years.

Death Benefit

In case of death of the Subscriber the entire Corpus is given to the nominee. In case Subscriber has not opted for any nominee, the legal heir can claim the amount.

Partial Withdrawal from the Scheme

In the entire life span, 3 partial withdrawals are allowed from Tier I account before attainment of at 60 years as shown below

  • First withdrawal will be after 10 years of account opening

  • 2nd and 3rd withdrawal would be after a gap of 5 years from the first withdrawal

25% of the Contribution amount will be allowed for specific purposes like Child marriage, Higher education, Treatment of Critical illnesses, buying home etc.

Investment in Annuity

As discussed above, on exit from NPS or retirement some portion of Corpus has to be invested into Annuity scheme to provide monthly pension then after. Entities registered with PFRDA to provide annuity service are

  • HDFC Standard Life Insurance Company Limited

  • ICICI Prudential Life Insurance Company Limited

  • Bajaj Allianz Life Insurance Company Limited

  • Reliance Life Insurance Company Limited

  • Star Union Dai-ichi Life Insurance Company Limited

  • Life Insurance Corporation of India

Charges under NPS

Charges under NPS are defined by the regulator as per below chart. These charges are exclusive of Service Tax.

Intermediary

Charge Head

Charge

Frequency of deduction

Mode of deduction

PoP

Subscriber Registration Charge

Rs.125

One time at the time of registration

Deducted from the initial contribution amount deposited by Subscriber

Contribution processing charge

0.25% of the Contribution amount subject to minimum Rs.20 and maximum Rs.25,000

On each transaction

Deducted from the amount deposited by the Subscriber

Non – Financial Transaction Processing Charge

Rs.20

On each transaction

Collected from Subscriber separately

CRA

NPS Account opening charge

Rs.50

One time

Collected by cancelling units on a quarterly basis

Account Maintenance charge

Rs.190

Annual

Financial transaction processing charge

Rs.4

On each transaction

Pension Fund Manager

Asset Management Charge

0.01%

Annual

Adjusted before NAV publication

Custodian

Asset Servicing Charge

0.0075%

Annual

NPS Trust

Trust Management Charge

0.01% (no Service Tax applicable)

Annual