National Pension Scheme-Features, Benefits, Taxation & More

With a better rate of interest than bank FDs, National Pension Scheme can be a good investment tool for retirement planning and tax planning

Retirement has always been one of the reasons for financial planning. While most people retire at 60, the average life expectancy of an individual is around 72 to 80 years. This means that an individual needs to have adequate funds till the age of 80 years to maintain a decent lifestyle. 

There are innumerable ways to invest for retirement. However, what individuals look for is, generally, a low-risk investment tool. Bank Fixed deposits are considered to be safe. However, the rate of interest on these instruments does not match other money market and debt instruments. 

For individuals looking to invest in a tool other than FDs, should consider Government initiated National Pension Scheme or NPS as it is one of the safest tools to invest in. 

What is National Pension Scheme?

The National Pension Scheme falls under the purview of the Pension Fund Regulatory and Development Authority (PFRDA). Under the PFRDA Act 2013, NPS schemes are voluntary. Investors looking to invest in long-term retirement plans can invest in NPS. 

In 2004, when the NPS scheme was launched, only government employees fell under the National Pension Scheme eligibility criteria. This was changed in 2009 when the pension scheme was opened to all salaried citizens, including the employees of unorganized sector, public and private companies. 

Objective of National Pension Scheme 

Post-retirement, life does not come to a stand-still. With an average life expectancy of at least 20 years post-retirement, it is necessary to have the financial means to take care of the rising expenses. Creating a sustainable corpus is the answer to such expenses. 

To ensure that the senior citizens of the country are financially safe, the Indian Government initiated the National Pension Scheme as a part of the reformation of the pension sector. Investing in NPS would allow savings during the working years and create the financial nest for the future. 

National Pension Scheme Eligibility

The National Pension Scheme eligibility is as below:

1. Citizenship: A Resident, as well as a Non-Resident Indian (NRI), can open an NPS account. Any contribution made by an NRI is subject to regulatory filings as preset by RBI and FEMA. OCI (Overseas Citizens of India), PIO (Person of Indian Origin) cardholders, and HUFs, however, cannot open an NPS account.
   
2. Age Criteria: To invest in the NPS scheme, you will need to be between the age of 18-70 years at the time of submission of your NPS account application. 
   
3. Retirement Planning: One of the purposes of investing is to create a retirement corpus. NPS forms a sustainable tool for those individuals who want to be financially free during their retirement years. 
4. Pension Income: Sometimes having a retirement fund is not enough. For individuals who wish to have a regular flow of income during the retirement years, investing in an NPS scheme can be the solution. On retirement, a part of the corpus is used to purchase annuity. This annuity scheme provides regular income during the retirement phase.
   
5. Risk-Averse Investment: Investments are subject to market risk. NPS funds are comparatively low-risk investments and suit the risk appetite of risk-averse individuals.
   
6. Tax-Savings: For an investor looking for tax saving schemes, National Pension Scheme can be a viable option as there are tax exemptions under Section 80CCD (1), Section 80CCD(2). 

National Pension Scheme Details and Types of Accounts

To open an NPS account is not a difficult task. You can open an NPS account online as well as offline. 

If you choose to open an NPS account online, you can do so on the eNPS site with your Aadhar card, PAN Card, and mobile number. 

To open an offline account, you can visit one of PFRDA appointed Point of Presence (PoP), a bank, Central Recordkeeping Agency or an NPS trust.

There are two types of accounts when it comes to investing in NPS. There is an Individual NPS account (Citizen Account) and a Corporate NPS Account

Citizen NPS Account: In the Citizen NPS account, the individual is the sole contributor. Decisions on Investment choices, scheme preference, annuity service provider is done by the individual alone. To open a Citizen NPS account, you need to be between the age of 18-70 years. You will have to deposit funds in the account, at least once in the financial year, to keep it operational. 

Corporate NPS Account: Unlike the Citizen Model, the individual and the employer are the contributors of the Corporate NPS account. The entity will first have to register itself for a corporate NPS account. This account can run parallel to a PPF account and a gratuity account which is also held by the entity.

While these are two types of accounts, there are two-sub accounts available as well:

Tier I- This is the default retirement and pension account of the individual. Under this account, the individual account holder is not permitted to withdraw funds until retirement. 

Contributions: A Minimum deposit of INR 500 is all that is needed to open the account. Your minimum per year contribution needs to be INR 1000 and you will need to make one deposit per year to keep the account active and not attract a fine. 

Tier II- Unlike a Tier I account, this account is a voluntary savings account. To operate this account, you will have to first open a Tier I account.  Once the account is operational, you can withdraw funds from this account when you want.

Contributions: A Minimum deposit of INR 1000 is all that is needed to open the account. Your minimum per year contribution needs to be INR 250. There is no maximum limit that you can deposit on this NPS account. 

Individuals also have two choices when it comes to investing:

1. Auto Choice: Auto choice of investment is the default investment choice as per the system. This depends on the age of the investor. Funds are managed automatically by a default fund manager. 
2. Active Choice: Under this investment choice, it is the decision of the individual as to which asset classes his funds need to be invested in. The individual can choose to spread out his funds in various percentages in various asset classes. There is, however, a 50% cap on investing in Equities.

Investment choices are available as under:

Asset Class E can invest 50% in stocks
Asset Class C Invests in Fixed Income instruments other than government securities
Asset Class G Invests in Government Securities only.

National Pension Scheme Benefits & Features

• Regulated: The National Pension Scheme is regulated by the PFRDA. This ensures that there is transparency in the activities conducted by the NPS Trust. This gives investors a sense of security when it comes to their investments.

• Voluntary: NPS is a voluntary long-term retirement scheme. Individuals can open an NPS account at a given time of the financial year. They also have the option to change how much money they would want to invest and save per year.

• Portable: On opening an NPS account, investors are given a Permanent Retirement Account Number (PRAN). Even if the individual changes his residence or his employment, the NPS account, and the PRAN remains the same. This account can be operated from anywhere.

• Flexibility: The National Pension Scheme allows investors to make systematic and regular payments to create their retirement fund. They have the option of opening a Tier I or Tier II account. One of the National Pension Scheme benefits is that under the Active Choice investment scheme, they can decide on the percentage of funds to be allocated in the different asset classes.

• Returns: When an NPS account is operational, the account and fund details are is passed on to the pension fund manager. This fund manager will invest the same in different proportions in various asset classes. However, the returns are market-driven and there is no defined amount of returns. When compared to traditional tax-saving investments like PPF, equity invested through Nation Pension Scheme can give better returns.The National Pension Scheme interest rate, in the past, have ranged between 9% to 12%.

Withdrawal of Funds from Your NPS Account

National Pension Scheme benefits individuals who are looking to invest for their retirement in a long-term investment instrument. So, once you reach the retirement age of 60 years, you can have enough funds to be financially secure. However, withdrawal rules of the NPS account are carriable, depending on the time of withdrawal.

Once you reach 60 years of age, you can withdraw 100% of your funds only if the amount accumulates is less than INR 2 Lakh. 

If the amount exceeds INR 2 lakhs, you can withdraw 60% of your funds. The remaining 40% will be used to purchase of annuity. This purchase of annuity supports you in receiving a monthly pension. 

If the account has been operational for 10 years, you can also withdraw 20% of your NPS funds The remaining 80% is used for annuity purchases. 

If the amount does not exceed INR 1 Lakh, you can withdraw 100% of the funds. 

In case of death of the account holder, the legal heir/ nominee gets 100% of the funds. 

National Pension Scheme Tax Benefit

The National Pension Scheme tax benefits are considered to be attractive for investors. 

	National Pension Scheme Tax Benefit allowed
Under Section 80CCD 1 (B)	Individuals investing in Tier I NPS account can claim a tax benefit of INR 50,000 over and above the INR 1,50,000 exemption which falls under Section 80C
Under Section 80CCD (2)	For employers who contribute to Tier I NPS account, a tax exemption of 14% is eligible for central government contribution and 10% for others
On Partial Withdrawal	Amount withdrawn up to 25% is exempt from Tax.
On Lump Sum withdrawal after 60 years	Amount withdrawn up to 40% is exempt from tax.
Annuity Purchase	Any amount invested for the purchase of annuity is tax-free. However, the income received on the annuity is taxed.

Conclusion

The National Pension Scheme works as a rather successful tool for individuals looking to invest for the long term. The risks associated with NPS is also considerably low and the National Pension Scheme interest rates are better than traditional saving tools. If your goal is to create a financial nest for your retirement and still have a regular flow of income, National Pension Scheme can be the investment tool for you. 

Frequently Asked Questions (FAQs)

1. Who is Eligible for the National Pension Scheme?

Indian Residents between the age bracket of 18-70 years are eligible to invest in the National Pension Scheme. Non-Resident Indians can also open an NPS account and have to follow the guidelines as provided by RBI and FEMA. However, Hindu Undivided Family, Person of India Origin, and Overseas Citizens of India cannot apply for National Pension Scheme.

2. Which is Better: NPS or PPF?

Public Provident Fund (PPF) provides fixed returns. NPS on the other hand tends to invest a portion of your funds in equities which can give better returns. Looking at the interest rates, PPF interest rates tend to be lower as compared to Nation Pension Scheme interest rates. The choice of investment, however, lies with the investor and his risk appetite.

3. How to Invest in National Pension Scheme?

You can invest in an NPS scheme online as well as offline through various PoPs, trusted banks, Central Recordkeeping Agency, or an NPS trust.
To invest in the National Pension Scheme online, you will need to head to the Nivesh app or web portal and open an account. You will need your PAN Card, Aadhar Card, and a registered mobile number. Validation of the account is done through an OTP, which then generates a Permanent Retirement Account Number for you. 

5. Can I withdraw NPS Amount?

There is a lock-in period when it comes to NPS account. Once you reach the age of 60, you can withdraw up to 60% of your funds and use the remaining 40% to purchase annuity. If the amount is less than INR 2 lakhs, you can withdraw the full amount. 
If you invested in NPS for 10 years, you can withdraw 20%  of the funds and purchase an annuity with the rest of the 80%. If the amount does not exceed INR 1 lakh, you can withdraw 100%.

6. How to Invest in National Pension Scheme?

Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:

1. Create an account in Nivesh by providing your basic details. (If you already have an account then just login into your account)

2. On your portfolio page click on the Buy New tab at the right top corner of the screen.

3. Select NPS and choose the scheme you want to purchase.

4. Your request will be generated and a relationship manager will get in touch with you for getting the investment done.