How Does NPS Work? Should You Invest?

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    We all feel the need to save for our retirement while we can. An investment or savings scheme that has tax benefits is beneficial as well as sensible.

    The size of your income post your retirement depends on the size of income you manage to accumulate during your working years. The National Pension System (NPS) is one such scheme introduced by the Government of India that allows you to make a planned contribution towards your retirement years.

    What is NPS?

    National Pension System, also known as NPS was introduced by the Indian government for voluntary contribution towards an individual's retirement fund as a plan to receive regular income as senior citizens.

    The returns from these investments are market-linked. Investments are made in a mix of assets based on the age of the investor.

    It is regulated by Pension Fund Regulatory and Development Authority (PFRDA). National Securities Depository Limited (NSDL) e-Governance Infrastructure Ltd. is its Central Recordkeeping Agency (CRA).

    How does NPS work?

    There are two types of accounts that you can open under NPS: Tier I and Tier II.

    • Tier I account is a permanent retirement account that cannot be withdrawn without exit-load.
    • Tier II account on the other hand, is more like an investment facility and can be withdrawn without any exit-load. However, it can only be opened if you have an active Tier I account.

     

     

    How to open an NPS account?

    • You need to open a Permanent Retirement Account (PRA) by filling the application form. It is available on www.npscra.nsdl.co.in (Link: Subscriber Corner > Forms > for Subscriber registration).
    • Submit the application to your nearest Point Of Presence - Service Provider (POP-SP). Locate your nearest POP-SP at https://www.npscra.nsdl.co.in/pop-sp.php.
    • Check the status of your application on https://cra-nsdl.com/CRA/ using your 17 digit receipt number.

    You can open a Tier I and II account together using CSRF-1 form.

    The same PRAN will continue to be, even if you change your job or residence.

    Minimum contribution

    First Contribution

    • Tier I: Rs 500
    • Tier II: Rs 1,000

    Annual contribution

    • Tier I: Rs 1,000
    • Tier II: No requirement
    You can contribute any amount and any number of times beyond this.

    Investment options

    You have two investment approaches to choose from: Active and Auto. You can also choose your Pension Fund Managers (PFMs) from the list appointed by the PFRDA.

    The asset classes in NPS are:

    1. Equity (E): A 'high return-high risk' fund that invests predominantly in equity.
    2. Corporate Debt (C): A 'medium return-medium risk' fund that invests predominantly in fixed income bearing instruments.
    3. Government Securities (G): A 'low return-low risk' fund that invests purely in Government Securities.

    In the 'Active' choice can design your own portfolio by allocation funds among asset classes E, C or G.

    The 'Auto' choice distributes your investment based on your age. For example, for individuals below the age of 35 years, 50% of the funds are allocated in E and for those above the age of 55, 80% is allocated to G.

    It makes sure that your younger years are 'High risk-high return' and older years are contributing towards low risk options.

    Benefits of NPS

    • You can claim exemption under Section 80CCD(1B) and 80 CCE. This exemption is only applicable on Tier I contribution.
    • You have the option to plan the allocation of the funds invested and contribute as much as you wish.
    • You can conveniently maintain your PRAN account even if you shift between corporate and government job.
    • You can change you POP-SP. However, the POP-SP should be same for Tier I and Tier II accounts.

    Withdrawal

    • If you want to exit the NPS after 60 years of age, you will have to use at least 40% of your accumulated pension fund to purchase an annuity that would provide you a regular monthly pension. The remaining funds can be withdrawn as lump sum. 
    • If you wish exit NPS before you turn 60, you will have to use at least 80% of your accumulated pension fund towards purchase of an annuity for a regular monthly pension The remaining funds can be withdrawn as lump sum; provided, you have stayed in NPS for at least 10 years.
    • For partial withdrawal, your withdrawal amount cannot exceed 25% of the contributions made by you. Also, it can only have for specific reasons, and will be allowed a maximum of three times during the entire tenure of subscription with a gap of at least five years between two partial withdrawals.

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