How to invest in National Pension Scheme (NPS) of India 2021

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National Pension Scheme or NPS is a government-led program that aims to offer retirement benefits to all Indian citizens, including those in private sector. NPS is a pension scheme that is run by experienced fund managers. It is governed and regulated by the Pension Fund Regulatory and Development Authority under the PFRDA Act 2013.

Pension plans offer financial protection and security during an individual’s retirement years when he or she does not have a stable stream of income. National Pension Scheme guarantees that citizens can age with dignity and without sacrificing their quality of life. Pension plans allow individuals not only to save but also build assets while receiving a lump sum payment as a daily income stream via an annuity plan after retirement.

Although National Pension Scheme (NPS) is a scheme administered by Government of India and aimed at providing retirement protection to Indian citizens, the Government will make no contribution to an individual’s NPS account. Unlike the corporate pension schemes, where employer and employee both contribute to the plan, investments in the NPS account are done solely by individuals.

What is National Pension Scheme (NPS) of India?

On 10 October 2003, the Government of India created the Pension Fund Regulatory and Development Authority (PFRDA) to establish and manage India’s pension system. On 1 January 2004, the National Pension System (NPS) was introduced with the aim of guaranteeing retirement benefits to all people. The National Pension Scheme intends to strengthen pension reforms of the country and to instill in individuals the discipline of retirement planning.

The scheme enables investors to make monthly contributions to a pension plan during their professional lifetime. When investors retire, they may redeem a portion of the investment in a lump sum and utilize the remainder to purchase an annuity to ensure a daily income after retirement.

Who is the National Pension System (NPS) Authority?

The Pension Fund Regulatory and Development Authority (PFRDA) is an independent entity established by the Indian government with the mission of developing and regulating the Indian pension sector. PFRDA is the main authority which manages National Pension Scheme. 

What is the purpose of National Pension Scheme (NPS)?

National Pension Scheme is mostly concerned with post retirement income. Although an investor can withdraw up to 60% of the retirement corpus as a lump sum on the maturity, the remaining balance balance is required to be annuitized, which means that the remaining balance is utilized to cover the pension after retirement. This pension is entirely taxable under income from other sources category in the year it is received.

Who should invest in National Pension Scheme (NPS)?

National Pension Scheme is an excellent option for someone who wishes to begin planning for retirement earlier and has a lower tolerance for risk. A steady inflation beating pension income during an individual’s retirement years would undoubtedly be beneficial, particularly for those who get retirement from private-sector employment.

A systematic investment in this manner can have a significant impact on an investor’s life after retirement. Indeed, salaried individuals seeking to maximize their 80C savings can also find this strategy useful in long term.

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Who can invest in National Pension Scheme (NPS)?

National Pension Scheme is essential to all new Central Government employees (except those serving in the Armed Forces) and Central Autonomous Bodies who join the Government job on or after 1 January 2004. Anybody else who is government employee who is not required to be protected by NPS can also apply to NPS via a Point of Presence (POP) or Service Provider (SP) like Chitale CFS Pvt Ltd under the “All Citizen Model”.

NPS is also applicable to all officials of State Governments and State Autonomous Bodies who enter their services after the relevant notification dates which State Governments announced for NPS. 

On the contrary, an employee of private company will have the option of making investment decisions in NPS. In this case, the corporate or subscribers have an option to choose from the Pension Fund Managers (PFMs) available under the “All Citizen Model,” as well as the proportion of allocation of funds to different asset classes under this scheme.

NPS is open to all Indian people aged 18 to 60 as of the date of submitting the application to a Point of Presence (POP) or Service Provider (POP-SP).

What are Tier I and Tier II accounts in NPS?

Tier I and Tier II NPS accounts are conceptually identical. Both charge equal fees and offer a similar selection of fund managers as well as fund schemes. The fund managers can also participate in the same asset groups.

The Pension Fund Manager (PFM) charges a fee of 0.01 percent on assets handled, while the custodian charges a fee of 0.0032 percent on assets serviced. When you deposit funds in Tier I or Tier II NPS, the POP charges the same fees on each transaction. Additionally, you can switch between PFMs and fund alternatives using both NPS Tier I and Tier II.

What NPS Tier I Account?

The subscription to NPS begins with the establishment of a Tier I account, which includes a PRAN (Permanent Retirement Account Number). Till the time an investor reach the age of 60, his or her money in the NPS Tier I account is locked in.

Prior to reaching the age of 60, the investor can make withdrawals partially for particular reasons or opt for an early exit from the scheme . Under Tier I of the NPS, you can invest and claim tax deductions under separate components of the Income Tax sections.

What is NPS Tier II Account? 

An individual is only qualified to subscribe for an NPS Tier II account if he or she already has subscribed to NPS Tier I account. Tier II accounts are optional and have minimal withdrawal and exit restrictions. Although it functions identically to any NPS Tier I account, there are some distinctions.

To begin, subscriber of NPS Tier II account cannot claim tax benefits so no deductions are available, and the corpus is taxed upon withdrawal. NPS Tier II account does not have a lock-in period for withdrawals like NPS Tier I account. Investors can withdraw funds at any point of time from their Tier II account. However, both Tier I and Tier II are functionally equivalent, as are the fund management fees and investment selection.

What are the Types of NPS Account?

Individual NPS accounts under All Citizen Model and corporate NPS accounts are the two primary categories under NPS.

Individual NPS Account:

The subscriber is the only contributor in case of Individual NPS account. In individual NPS account, the subscriber can make all choices about Scheme selection, Investment options etc. Any Indian citizen may open an Individual NPS account willingly in order to claim tax benefits on NPS contribution and to secure a guaranteed income after retirement.

Corporate NPS Account:

When a business decides to offer an NPS scheme to its staff as a retirement perk, this is referred to as a Corporate NPS account. Corporate NPS benefits are available to any staff member of a company that is associated with a CRA for NPS. The staff members and the employer both contribute to the same NPS account in this case.

The employer contributes a specified amount to the employee’s NPS account on his or her behalf. Contribution from employer does not surpass 10% of the employee’s basic plus DA salary. Additionally, the employee contributes to the same account. This results in a better contribution to the account and thus provides the employee with greater tax benefits.

What are the benefits of National Pension Scheme (NPS)?

Like a long term mutual fund investment, National Pension System (NPS) also offers a number of benefits as compared to traditional pension schemes. Some of the NPS benefits are listed below:

National Pension System (NPS) is straightforward:

NPS is a straightforward scheme and a cost-efficient investment model in which funds are invested in retirement plans and subscribers are informed daily of their investment’s worth.

National Pension System (NPS) is easy:

The scheme is very easy to subscribe as the applicant only needs to open an account and get a Permanent Retirement Account Number.

National Pension System (NPS) is transferable:

In this scheme, every employee is recognized by a specific number and is assigned a unique PRAN that is transferable, ensuring that the employee can retail this unique number even if he or she switches the job and join a new company.

National Pension System (NPS) is regulated:

As NPS is regulated by PFRDA, it is trustworthy! It offers very clear investment norms and NPS trust carries out regular monitoring and performance reviews of the scheme.

National Pension System (NPS) offer tax benefits:

NPS offers tax benefits to Tier I subscriber. Income tax benefits for National Pension Scheme investments can be claimed as described below:

1) Own contribution of a subscriber towards Tier I investments tax-deductible within the total ceiling of Rs.1.5 lakh u/s 80C as applicable under U/S 80 CCD(1) of Income tax Act 1961

2) In addition to deductions under section 80CCD (1), subscribers are allowed up to Rs.50,000 as deductions towards Tier I contributions under U/S 80CCD (1B) of Income Tax Act 1961

3) Under U/S 80CCD (2) of Income Tax Act 1961, contribution of an employer towards Tier I investments is eligible for deduction up to 14% for central government contributions and up to 10% for others. This deduction is over and above the deduction limit applicable u/s 80C.

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How to withdraw money from National Pension Scheme (NPS)?

Despite popular belief, you cannot redeem the entire balance of your NPS plan upon retirement. To earn a routine pension from a PFRDA-registered insurance company, you are expected to set aside minimum 40% of the total fund. An investor can claim tax benefits for the entire 60% of corpus. 

As main purpose of a pension plan, it is critical that you continue to save till the time you reach the age of 60. If an investor has invested for at least three years in NPS, he or she can withdraw up to 25% for certain financial purposes like children’s weddings or higher education planning, buying a house, or medical emergencies.

An investor can withdraw up to three times during the entire tenure of scheme provided that there is a gap of five years between each withdrawal. These requirements apply only to tier I accounts only and they do not apply to tier II accounts. 

How to invest in National Pension Scheme (NPS)?

Subscribers may enroll in NPS via offline as well online application. The scheme’s ultimate purpose is to offer everyone an enticing long-term investment vehicle for retirement planning via secure and fair market-based returns. All Indian citizens between the ages of 18 and 60 can open NPS account.

How to apply for NPS account offline?

To subscribe for an National Pension Scheme account manually or through offline process, first you must locate a Point of Presence (POP), such as a bank or service providers like Chitale CFS Pvt Ltd. Pick up a subscription form from your local Point of Presence (POP) and apply through the form along with your KYC documents. In case you are applying through bank, the bank might skip the KYC process as you have already done bank KYC. 

Following your initial deposit, the PoP will assign you a Permanent Retirement Account Number. This number, along with the password included in your enclosed welcome package, will assist you in operating your NPS account online or offline. This NPS account procedure requires a one-time registration fee as well.

How to apply for NPS account online?

An investor can directly apply to National Pension Scheme by following simple steps through this official NPS scheme website.

What is the minimum contribution for National Pension Scheme (NPS)?

While opening NPS account, an investor needs to pay minimum contribution to NPS as explained below: 

Minimum Contribution Required Tier I Tier II
At the time of account opening Rs. 500 Rs. 1000
Subsequent Contribution amount Rs. 500 Rs. 250
Contribution required per year Rs. 1000 Nil
Number of contributions required per year 1 Nil

What is Asset Allocation in National Pension Scheme (NPS)?

Not only does NPS provide you with the choice of selecting from a number of asset classes, it also allows you to specify the percentage of funds to be allocated to every asset class. Although getting options when investing is undoubtedly valuable, it’s easy to feel distracted when confronted with too many options.

What is NPS Active Choice Investment?

The primary advantage of NPS Active Choice investment plan is the discretion you gain in choosing the proportion of asset allocation in NPS that you believe is most appropriate for achieving your financial goals.

Moreover, when you are near to your retirement age, the NPS Active Choice method automatically decreases your National Pension Scheme portfolio’s exposure to Equities and raises its allocation to Debt assets to further mitigate the market volatility.

In contrast to conventional investment offerings, NPS enables you to build your own investment or retirement portfolio. You can tailor your portfolio to your risk tolerance by allocating investment funds among the four different asset groups. This is referred to as Active Choice. Following are the four asset classes are available under Active choice:

1) Equities (E) – The funds are invested in the stock market and other financial instruments related to Indian equity market.

2) Corporate Debt (C) – The funds are invested mainly in Money Market Instruments and Bonds issued by a variety of corporations, including infrastructure corporations, public sector units, and public financial institutions.

3) Government Securities (G) – The funds are invested in Money Market Instruments and Government Securities issued by state as well as central governments.

4) Alternative Investment Funds (A) – The funds are invested in novel investment vehicles such as Real Estate Investment Trusts (REITs), Commercial Mortgage-Backed Securities (CMBS), Infrastructure Investment Trusts (InvITs) and Mortgage-Backed Securities (MBS), among others.

What is NPS Auto Choice Investment?

Frequently planning and timely reviewing your investment portfolio can be a complicated and time-consuming process. In the event that you do not wish to pursue an Active Choice option, NPS allows you to choose a well structured and passive allocation of your portfolio. This is referred to as the Auto choice.

In Auto Choice NPS plan, your funds will be invested in asset groups – E, C, and G – in percentages primarily determined by your age. As a thumb rule an individual’s age grows, his or her allocated to risky asset classes like equity steadily decreases and his or her exposure to safer investment asset classes such government securities increases.

Auto Choice offers three distinct risk profiles or life cycle funds based on the subscriber’s risk tolerance which are Aggressive (LC75), Moderate (LC50), and Conservative Life Cycle Fun (LC 25) .

1) Aggressive Life Cycle Fund (LC-75): Maximum Equity allocation is 75% up to the age of 35

2) Moderate Life Cycle Fund (LC-50): Maximum Equity allocation is 50% up to the age of 35

3) Conservative Life Cycle Fund (LC-25): Maximum Equity allocation is 25% up to the age of 35

Auto Choice is based on the premise that as an investor ages and approaches to retirement, his or her primary objective should be to preserve the wealth by mitigating investment risk. This is accomplished by adjusting your NPS asset allocation based on your age.

During 30s, when investor’s retirement is at about 20-25 years away, it is recommended to pursue NPS investments as a long-term investment choice for retirement planning. Therefore, out of the three Life Cycle Fund alternatives available through NPS Auto Choice Life Cycle Funds, LC75 offers the best long-term growth potential for your NPS retirement planning.

Additionally, when an investor approaches retirement, LC75 will automatically rebalance your NPS asset allocation to prioritize capital protection by rising the percentage of Debt assets that can help to mitigate the effect of short-term fluctuations in investor’s equity allocation. Hence, even if you’re a cautious investor in your 30s, Aggressive Life Cycle Fund (LC75) is the optimal NPS investment alternative out of two other NPS life cycle funds.

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We have an excellent retirement calculator which can help you to check how much money you need to save to take care of your retirement.

What is the Lock-in Period for NPS?

National Pension Scheme  is basically a retirement tool, and investor’s contribute to NPS with the aim of saving for their post-retirement period. According to the PFRDA Regulations 2015, NPS subscribers can withdraw funds subject to the following scenarios:

NPS Superannuation:

When an investor attains the age of 60, he or she will be able to withdraw up to 60% of the accrued corpus as a lump sum, with the remainder deposited for a typical monthly or quarterly pension for the period specified by the recipient. If the subscriber’s cumulative accrued pension fund is less than or equal to Rs. 2 lakh, he or she will choose for a 100 percent lump sum withdrawal.

NPS Pre-mature Withdrawal:

In the event that the subscriber is looking for a premature withdrawal, the NPS subscriber can apply for a pre-mature exit after spending ten years in the National Pension Scheme.

An individual can withdraw up to 20% of the accrued corpus as a lump sum withdrawal, with the remainder reserved for standard monthly or quarterly pensions for the period specified by the subscriber. If the subscriber’s total corpus is less than or equal to one lakh, he or she will be able to choose for a 100% lump sum withdrawal.

NPS Withdrawal Upon Subscriber’s Death:

In case of Death, the subscriber’s entire accrued pension corpus (100%) will be paid to the subscriber’s nominee/legal successor.

Can you have multiple National Pension Scheme accounts?

Multiple accounts for the same subscriber are not permitted because National Pension Scheme offers account which is entirely transferable across industries as well as locations; therefore, the subscriber does not require registering for a fresh account in the event of change in employment or location. 

For more information on National Pension Scheme , you can check this official FAQ section!