National Pension Scheme (NPS)

What is national pension scheme (NPS)?

It is a government promoted pension scheme. The Scheme allows to the subscribers to contribute a regular amount to their pension account during their working life. At the time of retirement (normally at the age of 60 years which may be extended up to 65 years) contributors to pension account can withdraw 60% of the money without paying any tax & remaining 40% of the money will be invested in annuity which will give a monthly return in the form of pension.

Who can become the subscriber of the scheme?

It is a scheme advisable to those people who wants to plan their income after the retirement as it is a low risk investment. A systematic investment like NPS can be very supportive after the retirement. There are Income tax exemptions for contribution in NPS under section 80C and 80CCD.

Benefits of National Pension scheme (NPS)

1. Voluntary: A Subscriber can contribute at any point of time in a Financial Year and also change the amount he wants to set aside and save every year.
2. Simple:Subscriber is required to open an account with any one of the POPs (Point of Presence) or through eNPS (https://enps.nsdl.com/eNPS/).
3. Portable:Subscribers can operate their account from anywhere, even if they change the city and/or employment.
4. Low risk Investment: At present, there exists a cap in the range of 75% to 50% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age. However, for an investor of the age 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe from the equity market volatility. The earning potential of NPS is higher as compared to other fixed income schemes.
5. Higher Returns: Returns from NPS Scheme are higher than returns from traditional investments.
6. Income Tax Exemptions: following are exemptions provided under income tax act:

1. Section 80CCD(1): As per Section 80CCD(1) deduction on employee’s contribution to pension account is allowed. You can avail maximum deduction upto 10% of salary (in case of salaried) or 20% of gross total income (in case of self employed) or Rs. 1,50,000-whichever is lower.
2. Additional deduction u/s 80CCD(1B):Additional deduction u/s 80CCD (1B)of Rs. 50,000 is allowed to taxpayer for the amount deposited by them in NPS account under section 80CCD(1B).
3. Section 80CCD (2):The contribution made by employer’s to NPS account is allowed u/s 80CCD(2) up to 10% of salary.
4. Simple exit and easy withdrawal: As a pension scheme, it is very important for subscriber to continue investing until the age of 60. However, if you have been investing for at least 3 years, you may withdraw up to 25% for certain purposes. These include children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others. You can make a withdrawal for up to 3 times (with a gap of 5 years) in the entire tenure. These restrictions are only imposed on tier I accounts and not on tier II accounts.

What are the investment choices available in NPS?

NPS offers you two approaches to invest in your account:

1. Active choice
2. Auto choice

In Active choice, subscriber selects the allocation percentage in assets classes,however, in Auto choice; funds are automatically allocated amongst asset classes in a pre-defined matrix, based on the age of the subscriber. After selection of pension fund manager, Subscriber also has to exercise the choice of investment.

Where (in which asset classes) my money will get invested in NPS?

Following are the assets classes are available for investment under NPS:

1. Equity or E– A ‘high return-high risk’ fund that invests predominantly in equity market instruments
2. Corporate Debt or C – A ‘medium return-medium risk’ fund that invests predominantly in fixed income bearing instruments
3. Government Securities or G – A ‘low return-low risk’ fund that invests purely in Government Securities
4. Alternative Investment Funds or A –In this asset class, investments are being made in instruments like CMBS, MBS, REITS, AIFs, Invlts etc.

If you are a conservative investor, you can choose to invest your entire pension wealth in C or G asset class. However, if you want to have exposure to equity, you can allocate maximum 50% of your money to asset class ‘E’ or up to 5% in Alternative Investment Funds.