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Everything You Needed to Know About National Pension System (NPS)

Everything You Needed to Know About National Pension System (NPS)

National Pension System (NPS) is a voluntary social security scheme which was first introduced in 2014 by the Central Government of India. The scheme falls under the jurisdiction of the Pension Fund Regulatory and Development Authority (PFRDA). The aim of NPS is to provide monetary benefits in the form of pension after an individual reaches retirement.

Let’s look at some of the NPS scheme details.

What is NPS?

As the name suggests, NPS is a pension scheme initiated by the government of India to provide pension opportunity to every Indian. The scheme was floated in Jan 2014 for new government recruits. NPS is mandatory for all central government employees along with some State government employees who’ve joined after Jan 2004. NPS was made open to all from May 2009. The basic objective of the scheme is to inculcate a habit of saving specially for retirement.

Who can Enrol?

Any citizen of India between the age of 18-60 years can open an account. This account is not compulsory for government of India employees who have joined before Jan 2004. However, for such individuals, it is voluntary.

NPS Taxation Benefits

A maximum of INR 1,50,000 in investments per year in NPS can be claimed for tax deduction under the overall limit of Section 80 C. An additional INR 50,000 can be claimed for tax deduction under Section 80 CCD1B. NPS has an EET status i.e. exemption on investment, exemption on returns earned, but taxation on redemption. 40 percent of the corpus you get on retirement would be tax free.

Types of NPS Accounts

Tier 1 Account:

  • This type of account is mandatory for NPS subscribers

  • Government employees have to contribute 10 percent of their basic salary plus DA to this NPS account. The government makes an equal contribution

  • For non-government employees, they have to open an account with a minimum of INR 500 and they have to contribute a minimum of INR 6000 every year

  • For private sector employees, an option between an NPS and Employee Provident Fund (EPF) is given. If you go for NPS, you will have to make a contribution of about 10 percent of your basic salary plus DA. The employer will make an equal contribution. Keep in mind that the employer contribution is not taxable and comes under the Section 80 CCD2 on form 16 document

Tier 2 Account:

  • The Tier 2 account is a non-mandatory account for NPS subscribers

  • This is a type of NPS - all citizen model from which you can make withdrawals at any time

  • Further, no contributions will be made by the government or the employer in this account

  • No tax exemptions are available for investment into NPS through the Tier 2 account

  • To open a Tier 2 account you would need a minimum of INR 1000 and a minimum contribution amount of INR 250

  • Minimum account balance on Tier 2 accounts have to be INR 2000 at the end of each year

  • The treatment of returns from Tier 2 accounts is the same as Mutual Funds

Investing in NPS

Investments in NPS can be made through various fund managers. These fund managers invest into equity, corporate debt, and government securities in varying proportions. When you invest in an NPS, there are three choices available to you: Active choice, Auto Choice, and Default Choice.

  • In active choice, you can decide the proportion of your money getting invested into the three investment choices mentioned above. However, not more than 50 percent investment can be allocated to equities

  • In auto choice, the allocation of investments into the three investment choices depends on your age. Till you are 35 years old, 50 percent of the investment of your investment will be allocated to equity and 30 percent to corporate debt. This allocation will reduce each year 2% for equity and 1% for corporate debt till you reach 50 years. By this time, both your equity and corporate debt allocation will be 10%

  • In default choice, up to 50 percent of the investment is allocated to government securities. Up to 40 percent gets invested into corporate debt. Up to 15 percent gets invested into equity. The remaining 5 percent gets invested into money market instruments

  • Government employees have to opt for the default investment option

How to Open NPS Account

You can open a Tier 1 and Tier 2 NPS account through PSU Banks, Private Banks like ICICI Bank, and Post Offices.

To open an NPS Account you would need to:

  • Fill up the NPS application form

  • Submit required documents along with KYC documents

  • After your NPS login is successful, the CRA will send you a PRAN (permanent retirement account number)

  • You must also pay the minimum account opening fee and the fund management fee

Withdrawals in NPS

After being in the scheme for 10 years, 25% of the contribution can be withdrawn for reasons like child’s higher education or marriage. There are other such reasons that you must keep in mind before you withdraw your NPS. In total, you can make three withdrawals with a gap of 5 years.

To know more about how much you stand to gain in NPS Interest rates, visit an NPS calculator to see your returns at the time of withdrawal.

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