It is that time of the year and as you rush to complete your tax planning for the year, we have put together all the information you need to know about the NPS. 

 

The National Pension System (NPS) is a voluntary defined contribution pension system that aims to provide old-age income at reasonable market-based returns over the long term. NPS is available to all citizens of India.

 

It is a social security initiative by the Central Government. This pension programme is open to employees from the public, private and even the unorganised sectors except those from the armed forces.

 

The scheme encourages people to invest in a pension account at regular intervals during the course of their employment. After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement.

 

Initially aimed at central government employees only, NPS was subsequently extended by the Pension Fund Regulatory and Development Authority (PFRDA) to all citizens. 

 

Consequently, any employee belonging to private sector or self-employed can avail of the new pension scheme. Also, it is important to note that the new pension scheme offers portability across various locations and jobs.

 

NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

 

A portion of the NPS goes to equities (this may not offer guaranteed returns). However, it offers returns that are much higher than other traditional tax-saving investments like the PPF. 

 

The NPS can earn higher returns than the PPF or FDs, but it is not as tax-efficient upon maturity. For instance, you can withdraw up to 60% of your accumulated amount from your NPS account. Since last year, the PFRDA  tweaked its rule and permitted its subscribers to withdraw the entire accumulated pension wealth without purchasing annuity if the pension corpus is less than Rs5 lakh. However, investors should not expect very high returns from NPS in the short to medium term. Bond yields are beginning to rise and could shoot up if there is a rate hike. In such a situation, NPS investments may not deliver very attractive returns over the medium-term.

 

The NPS has become more investor friendly over the past few years. The entire 60% of the corpus withdrawn at the time of retirement is tax free as against earlier when only 40% was free. Younger investors can now allocate up to 75% to equities. Older investors can remain invested in the scheme even after they retire till the age of 70 and stagger their withdrawals. What’s more, active investors may soon be allowed to change their allocation and pension fund manager up to four times in a year.

 

The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. There are two options to invest in – auto choice or active choice.

 

The auto choice decides the risk profile of your investments based on your age. For instance, the older you are, the more stable and less risky your investments. The active choice allows you to decide the scheme and to split your investments.

 

This scheme has been in effect since 2004, and so far has delivered 8% to 10% annualised returns. In NPS, you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.This option is available for both tiers I and II accounts.

 

The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. We have explained these accounts below: The Tier-I account is mandatory for everyone who opts for the NPS scheme. The Central Government employees have to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.

 

 

Who is eligible?

 

Any citizen of India between the age of 18 and 70 years can open an NPS account. A non-resident Indian can also open an NPS account. A non-resident Indian can also open an NPS account. 

 

Opening account: 

 

There are two ways to open an NPS account: '

 

1) By visiting the POP-SP (point of presence service provider) which could be a bank branch, post office. 

 

2) Online through the eNPS website using PAN and bank details. 

 

 A PRAN (Permanent Retirement Account Number) is issued to each NPS subscriber.  In case of physical opening of account, the person can go to the nearest POP-SP and submit the PRAN application along with KYC documents. Once PRAN issued, PRAN card will be sent to correspondence address.

NPS operations are regulated by the PFRDA. 

 

Offline Method:

 

Certain banks and post offices are appointed as Point of Presence (PoP) where you can open an NPS account.

 

1. Find the nearest PoP and get an NPS subscriber form. Fill up the form and submit it with photocopies of your KYC documents such as Aadhaar card, PAN card, passport, etc.

 

2. If you are an existing customer of the bank, then you need not submit the KYC documents as they will already have your KYC information in their database.

 

3. Make an initial deposit into your account. It shouldn't be less than Rs.500 (excluding tax). The minimum contribution to Tier I NPS account in a year is Rs.1,000. You will have to make a one-time registration fee payment as well.

 

4. You will receive your Permanent Retirement Account Number (PRAN) from the PoP. The welcome kit will contain the PRAN and password which can be used to operate your account online.

 

5. You can log in to your NPS account online through the NSDL NPS portal or your internet banking account.

 

Online method:

 

It is very easy for individuals to open an NPS account online.

 

1. Visit the eNPS website (https://enps.nsdl.com/eNPS/NationalPensionSystem.html) to register online.

 

2. Your mobile number, Aadhaar, and Permanent Account Number (PAN) must be linked with the NPS account.

 

3. To complete the validation, an OTP will be sent to your registered mobile number.

 

4. Upon completion of registration, you (the subscriber) will receive a PRAN, which can be used to log in to your NPS account.

 

Alternatively, one can fifill up the online form by submission of necessary details and print the same, paste latest photograph, sign and submit it to the CRA. 

 

First contribution 

 

At the time of applying for registration, the subscriber needs to make the first contribution with a minimum of Rs 500. 

 

The applicant can track status of PRAN application by entering the receipt number at https://cra-nsdl.com/CRA/pranCardStatusInput.do

 

 NPS account can be opened only in individual capacity and not jointly or on behalf of HUF.

 

Tax Benefit:

 

There is a deduction of up to Rs.1.5 lakh to be claimed for NPS – for your contribution as well as for the contribution of the employer. 80CCD(1) covers the self-contribution, which is a part of Section 80C.

 

The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income.

 

Section 80CCD(2) covers the employer’s NPS contribution, which will not form a part of Section 80C. This benefit is not available for self-employed taxpayers.

 

The maximum amount eligible for deduction will be the lowest of the below:

 

 

Withdrawal rules after 60:

 

Contrary to common belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm. The remaining 60% is tax-free now. 

 

Early withdrawal and exit rules:

 

As a pension scheme, it is important for you to continue investing until the age of 60. However, if you have been investing for at least three 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 up to three times (with a gap of five years) in the entire tenure.

 

These restrictions are only imposed on tier I accounts and not on tier II accounts. 

 

The NPS is a conservative scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private-sector jobs.

 

A systematic investment like this can make a massive difference to your life post-retirement. In fact, salaried people who want to make the most of the 80C deductions can also consider this scheme.