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National Pension Scheme

National Pension Scheme is a voluntary retirement investment plan under the Pension Fund Regulatory and Development Authority (PFRDA) and Central Government.

What is NPS?

National Pension Scheme NPS is an initiative by the Central Government open to employees from public, private and unorganized sectors. Earlier, this scheme was open only to public sector employees. Now, it allows all Indian citizens to opt for a voluntary scheme.

An investor can invest during the period of his/ her employment at regular intervals. Post-retirement, a percentage of the accumulated amount is allowed to be withdrawn. The remaining amount is received by the investor monthly as a pension post-retirement

Why invest in NPS?

NPS is a good option of investment for an investor who wants a regular source of income post-retirement. Since this scheme is regulated by the Central Government, the risk is also low. However, risk also depends on an individual’s earnings and cost of living and differs on how much risk an investor is ready to take given his earnings and spends.

Systematic investment in NPS during employment leads to a systematic and regular source of income post-retirement, especially for private and unorganized sector employees.

Types of NPS

Particulars NPS Tier-I Account NPS Tier-II Account
Status Default Voluntary
Minimum Amount Rs 500 or Rs 1000 in a year must be invested Rs 250 must be invested
Maximum Amount No Limit No Limit
Withdrawal Not Allowed Allowed
Tax Implication Deduction u/s 80C up to Rs 1.5 lakh
Deduction u/s 80CCD up to Rs 50000
Government Employees
– Deduction u/s 80C up to Rs 1.5 lakh
Others
– No deduction

How to open an NPS account?

An NPS account can be opened both online and offline. The entire process is mentioned below:

Online application

Follow the below steps to apply for an NPS account online

  1. Visit the eNPS website to register
  2. Link your mobile number, PAN number and Aadhar number to the account
  3. Validate your registration using the OTP received at your registered mobile number
  4. On successful registration, Permanent Retirement Account Number (PRAN) will be received. PRAN is mandatory to login to the NPS account

Offline Process

Follow the below steps to apply for an NPS account offline

  1. Visit the nearest Point of Presence (POP) center branch, post office or bank branch and collect the application form
  2. Fill the application form, sign and submit along with Know Your Customer (KYC) documents. 
  3. On the first investment towards NPS, the POP center will send the PRAN along with the password
  4. A registration fee of Rs 125 is charged for offline registration

NPS withdrawal rules

NPS scheme promotes regular investment by the investor until retirement and provides a monthly pension after retirement. However, it also allows an investor to withdraw a certain portion of the amount invested on specific occasions.

NPS allows an investor to withdraw the investment made. This withdrawal also comes with terms and conditions.

Withdrawal before the age of 60 years

An investor can withdraw up to 25% of the total investment if he has invested for a continuous period of 3 years towards the NPS account. An investor is allowed to withdraw 3 times but there must be a gap of 5 years between the previous withdrawal and the withdrawal opted for. 

This withdrawal is allowed only on specific occasions listed below:

  1. Marriage of children
  2. Higher education
  3. Buying or building a house
  4. Medical treatment of self or family

Withdrawal after the age of 60 years

An investor is allowed to withdraw 60% of the investment once he reaches 60 years of age. The rest 40% of investment is retained to provide a monthly pension to the investor. No tax is levied on the withdrawal of 60% of the investment after the age of 60 years

NPS investment allocation rules

NPS invests in various schemes. Investment in equity is made under the Scheme E of the NPS. An investor is allowed to invest up to 50% of the total investment in equity.  Two equity allocation options are available to an investor: 

  • Active Choice
    • An investor is allowed to decide the scheme and type of split 
  • Auto Choice
    • Here the scheme is dependent on the risk profile of the investor and accordingly the scheme and split of investment are decided by NPS.  For example- If an investor is old, the choice of investment will be less risky and more stable.

Comparison of NPS with other tax-saving schemes

Scheme Rate of return Lock-in period Risk Tax Implications
NPS 8% to 10% Till retirement Depends on market fluctuation Deduction u/s 80C up to Rs 1.5 lakh. Additional Rs 50000 u/s 80CCD (1B)

Withdrawal after retirement up to 40% of the fund is tax-free
PPF 8.10% 15 years No-Risk Principal amount deductible u/s 80C deduction

Interest: Tax-free
FD 7% to 9% varies Bank to Bank 5 years No-Risk Principal amount deductible u/s 80C deduction

Interest: Taxable
ELSS 12% to 14% 3 years Depends on market fluctuation Principal amount deductible u/s 80C deduction

Interest- 10% LTCG
Dividend- 10% DDT

Comparison of NPS with ELSS

Equity Investment

ELSS primarily invests in equity-oriented mutual funds while NPS has a lower allocation of funds towards equity-oriented mutual funds. Hence, ELSS has a higher potential to generate higher returns than NPS

Lock-in period

ELSS has a lock-in period of 3 years while NPS has a lock-in till retirement which is much higher than ELSS

Risk Exposure

Since ELSS has a higher exposure to an equity-oriented mutual fund, the risk associated with investment is also high. However, the risk factor depends on how much risk an investor is ready to bear depending on his own cost of living and earnings.

Conclusion

NPS is an investment scheme aimed to provide a regular income post-retirement. It invests a portion of the funds in equity and this portion is exposed to market fluctuations, risks, and rewards. The quantum of exposure in equity is dependent on multiple factors. With the objective of income and wealth creation, an investor can also explore SIP, equity-oriented mutual funds, debt-oriented mutual funds. These options are also exposed to market fluctuations and risk but come with the bonus of higher returns. Again, depending on how much risk an investor wants to take depending on his cost of living and earnings, the decision could be made.

Published on February 10, 2020