As the name suggests NPS is a kind of Pension system generated by government authorities to provide pension facility to all the citizens irrespective of the sector in which they work. It helps the individual to save and invest money in order to get a regular monthly income after retirement. There are number of schemes launched by the government in past few years to make the pension facility available to all the citizens
WHY IS THERE NEED TO TAKE THESE PENSION SCHEMES?
- Pension nowadays has become an important aspect as the life expectancy age is increasing and thus, the retirement years have exceeded
- These schemes provide financial stability to the individual in older age when they do not have a regular source of income
- It allows the people to live with dignity and respect in the older age as they are no longer a financial burden for any one
- It helps the individual to maintain their standard and lifestyle of living
WHAT ARE THE BENEFITS OF INVESTING IN NATIONAL PENSION SCHEME (NPS)?
Taking an NPS has number of benefits listed below-
NPS Schemes provide transparency and are cost effective as they allow the investor to know the day to day investment value.
It is simple and easy to invest in NPS as it requires only an account in any nodal office. There the person investing in the NPS scheme is provided Permanent Retirement Account Number (PRAN) to track the account further.
Portability is in terms of PRAN (Permanent Retirement Account Number) as even if the insured gets transferred then also PRAN will remain same.
NPS is a regulated system as it is regulated by Pension Fund Regulatory and Development Authority, with transparency in terms of investment norms &proper review of fund managers by NPS
WHAT ARE THE ACCOUNT OPTIONS IN NPS?
- Tier I Account
- For Opening Tier I Account the investor needs to contribute INR 500 during account opening and for subsequent transactions
- Minimum Contribution amount during a year is INR 6000 excluding taxes
- Contribution needs to be made at least once in a year
- In case the minimum compulsory contribution during a year is less than INR 6000 then the account will freeze and further transactions cannot be done till it is reactivated
- For Reactivation of account, the investor needs to pay the minimum contribution plus the penalty charges of INR 100 per year during which the amount was not contributed
- Withdrawal facility is not available to the investor
- Tier II Account
- For Opening Tier II Account the investor needs to contribute INR 1000 during account opening and for minimum subsequent transactions contribution of INR 250
- Minimum Contribution amount during a year is INR 2000 excluding taxes
- Contribution needs to be made at least once in a year
- In case the minimum compulsory contribution is not made or minimum balance is not maintained in the account then the investor is penalised of INR 100
- Withdrawal facility is available in this type of account. But, the tax benefit is not provided on this type of account.
WHAT ARE THE INVESTMENT CHOICES AVAILABLE IN NPS?
The amount invested is NPS by the investor is further invested in a number of funds. There are basically two types of approach followed for investing the investor’s money: Active choice& Auto choice.
NPS gives the investor the choice to choose in which type of fund they want their contribution to be invested. This kind of approach is popularly known as “Active Choice” approach. In case investor do not want to make the choice then the money is invested by “Auto choice” approach.
WHAT ARE THE TYPES OF APPROACH FOLLOWED TO INVEST THE INVESTOR’S CONTRIBUTION?
- Active choice
- Funds options (Asset Class E, Asset Class C, and Asset Class G)
- Investor has the option to choose from any of the following options to invest the money contributed by him:
- Asset Class E – Investing in instruments of equity market but not more than 50%
- Asset Class C- Investing in fixed income instruments except for Government securities. It also gives the option to invest the whole amount in this class.
- Asset Class G – Investing in Government securities. It also gives the option to invest the whole amount in this class.
- Auto choice – Lifecycle Fund
- In Auto choice approach money is invested in different funds keeping in mind the age of investor
- In this approach, the money contributed is invested in life-cycle fund
- The money is invested in the above mentioned three asset classes keeping in mind a pre-defined portfolio.
CONTRIBUTION IN NPS
- Money can be contributed through any of the following options:
- Cheque should be from any local branch as outstation cheques are not accepted
- Or ECS
- But, if the depositor is submitting Cash more than INR 50000 then invertor needs to submit PAN Card details as well
WHAT ARE THE EXIT OPTIONS AVAILABLE IN NPS?
On attaining 60 years of age-
Maximum 60% of the amount can be withdrawn and minimum 40% of the amount is to be kept for purchasing an annuity. However, the annuity can also be purchased for more than 40%. The amount can remain invested till 70 years of age. In other words, you can withdraw the amount as per your requirement any time before 70 years of age.
Before attaining 60 years of age
Maximum 20% of the amount can be withdrawn and minimum 80% of the amount is to be kept for purchasing an annuity. However, the annuity can also be purchased for more than 80%.
Death of the investor
At the time of unfortunate death of the investor the nominee received 100% of the amount accumulated till date
WHAT IS TAX BENEFIT?
- If the investor invests in NPS then they are eligible for tax benefit under sec 80CCD(1)& 80CCEand the maximum amount that can be deducted is INR 150,000. However, the maximum deduction under this section is 10% of the gross income (self-employed) per annum or salary (Salaried investor) of the investor
- In addition INR 50000 deduction is allowed under section 80CCD (1B) per annum
- Option available only for Individual Investors, not HUF