The National Pension System (NPS) is a new pension scheme launched by the Government of India and regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
Under the scheme, individuals can regularly contribute money and get a lump sum at retirement and a fixed monthly income for a lifetime.
Any employee can contribute for retirement into this non-withdrawal account and avail tax benefits.
Here are major things to know:
List of pension funds available
Individuals can select any of the below-authorized pension funds:
- SBI pension Fund
- LIC Pension Fund
- UTI Retirement Solutions Limited
- ICICI Prudential Pension funds Management Company Limited
- Kotak Mahindra Pension Fund Limited
- Reliance Capital Pension Fund Limited
- HDFC Pension Fund Limited
Employees own contribution is eligible for tax deduction under Sec 80 CCD (1) of Income Tax Act for up to 10% of salary which includes basic salary and dearness allowance (DA).
This is including overall ceiling of Rs 1.50 lakhs under Sec 80 CCE of the Income Tax Act.
An employee can also avail tax deduction for the contribution made by the employer under section 80 CCD (2) up to 10% of salary which will be in addition to the tax benefits available under Sec 80 CCE.
The subscriber can also avail additional tax deduction which is allowed under sec 80CCD(1) for additional contribution in his NPS account which is restricted to Rs 50,000/- under sec 80CCD 1(B).
NPS has tax benefit on the capital appreciation amount and not on the principal amount.
Under National Pension Scheme there is a lock-in period until you attain 60 years of age.
Once an individual attains 60 years, 60 per cent of the sum is returned back, while 40 per cent must be invested in an annuity product.
NPS includes charges such as registration charges, account opening charges, annual maintenance charge, non financial transaction processing charge, contribution processing charge.
Subscriber registration charge is one-time registration charge around Rs 125. NPS account opening charges will be around Rs 50 and Account Maintenance charge will be around Rs 190.
All these charges together make the product less attractive.
Types of NPS Account
Under NPS, a subscriber gets an option to open two accounts. A Tier I account is mandatory to open in order to join NPS and Tier II is optional.
The main difference between the two is one is considered as pension account and other is investment account (Tier II). While, withdrawal is allowed in Tier II account.
The minimum annual contribution required for Tier I account is Rs 250. However, at the end of each year, there should be unit holdings worth Rs 2,000, which means that minimum annual contribution for Tier I account to be made is Rs 6,000.
Returns on NPS
NPS offers 3 funds to its subscribers and has options to choose from Active choice and Auto choice.
Under Auto choice, individuals investment is made depending on the age of the subscriber. Under Active Choice, individuals can have the flexibility to choose their own asset allocation.
The three funds are:
Corporate Bonds (C)
Government Securities (G)
As NPS returns are market linked, the returns will depend on the performance of Equity, Corporate Bonds, and Government Securities funds, the corpus will be created depending on the choice of investment.
How to open NPS account online?
Individuals can open NPS offline as well as online. When opening offline, a subscriber should carry and submit NPS Application form along with KYC documents POP for account opening.
Individuals can also visit the website and fill NPS Application form by clicking on "Apply Online" link.
Who can join NPS:
Central government employees:
The NPS is applicable to all new employees of central government departments (except the armed forces) and central autonomous organizations who join government departments as of January 1, 2004. Any other government employee who is not necessarily covered by the NPS can also subscribe to the NPS under All citizens Model via a Point of Presence - Service Provider (POP-SP).
State government employees
The NPS applies to all employees of state governments, autonomous state agencies who join services after the date of notification by the respective state governments. Any other government employee who is not necessarily covered by the NPS can also subscribe to the NPS under All Citizen Model through a point of presence - service provider (POP-SP).
A company would have the possibility to decide on the choice of investment either at the subscriber level or at the enterprise level centrally for all of its underlying subscribers. The company or the subscriber can choose one of the pension fund managers (PFMs) - External website which opens in a new window available under All citizen model and also the percentage in which the funds are allocated in different asset classes.
All citizens of India aged 18 to 60 years on the date of filing their application with Point of Presence (POP) / Point of Presence-Service Provider (POP-SP) can join NPS.