What is NPS?

The Central Government had introduced the National Pension System (NPS) with effect from January 1, 2004. NPS has been opened to all Indian citizens voluntarily by the Pension Fund Regulatory and Development Authority (PFRDA).

1. How does NPS works?

NPS investment encourages people to invest in a regular interval during the course of their employment and helps in building the retirement corpus. After retirement, we can choose to withdraw 60% of the total amount and the remaining amount 40% should be used to purchase an annuity which will be a regular income post-retirement.

2.Types of NPS Account:

2.1.1. NPS Tier-I Account: It’s a Retirement Saving Account and mandatory for everyone who opts for NPS scheme. Subscribers cannot withdraw the investments made towards the account until they retire at age 60. Minimum contribution is ₹1,000/- in a year and no limit for the maximum contribution. Subscribers are eligible Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of Rs. 1.50 lakh under Sec 80 CCE.nd additional Rs.0.50 lakhs under 80CCD(1B).

2.1.2. NPS Tier-II Account: It’s a Voluntary investment Account. Subscribers can open the account on a voluntary basis and will be able to withdraw the contributions made towards the account. Minimum contribution is ₹ 1,000/- at the time of activation and ₹250/- for subsequent contributions. No limit for the maximum contribution. Subscribers are not eligible for tax deductions under the account except Government employees can enjoy a tax deduction of up to Rs.1.5 lakh under 80(C).

1. Asset Classes:

There are four asset classes across which contributions can be invested.

Asset classes offered by Pension Fund Managers (PFMs) for investment;

• Equity (E): Invests predominantly in Equity market instruments.
• Corporate Debt(C): Invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments.
• Govt. Securities (G): Invests in Securities issued by Central Government, State Governments and Money Market Instruments.
• Alternative Investments (A): Invests in instruments such as Commercial Mortgaged Backed Securities (CMBS), Real Estate Investment Trust (REITS), Alternative Investment Funds (AIFs), Infrastructure Investment Trusts (InvITs) etc.

2.3. Choice of Investment:

2.3.1. Active Choice:This choice is for the NPS subscribers who wish to decide their asset mix on their own.

Permissible fund allocation under Active Choice:

Equity (E): Up to 75%, Corporate (C): Up to 100%, Government (G): Up to 100% and Alternative Investments (A): Up to 5% (This asset class is not available for investment of contributions made under Tier II account).

2.3.2. Auto Choice: The NPS Auto Choice option adopts a life-cycle based approach ;starts with an equity heavy portfolio during the subscriber young age and systematically reduces the equity exposure as the subscriber approaches retirement.

1. Aggressive Life Cycle Fund: In this option, maximum equity allocation can go up to 75%.
2. Moderate Life Cycle Fund: It is the default option, which caps the equity exposure to maximum of 50%.
3. Conservative Life Cycle Fund: As the name suggests, it takes a conservative approach to investing with maximum equity allocation capped at 25%.

3. Who can invest in NPS?

There are Three Models under NPS:

• Government Model: Central (except armed forces) ,State Government Employees, employees of Central Autonomous and State Autonomous Bodies. The individuals mandatorily subscribe to the NPS on becoming government employees. Under this model, a contribution of 10% of a government employee’s salary goes to the National Pension System with an equal contribution by the government. Central Government employees receive a contribution of 14% from the government. 
• Corporate Model: For companies/entities desirous of adopting the NPS platform to provide retirement benefit to its employees.
• All Citizen Model: For all Indian citizens aged between 18-75 years of age.

4. Withdrawals in NPS:

4.1. Partial withdrawals: If the subscriber has been investing for at least 3 years, he/she may withdraw up to 25% of the contribution for reasons like children’s higher education or marriage or medical treatment of self/family etc. One can make a withdrawal for up to three times in the entire tenure. These restrictions are only imposed on Tier I accounts and not on Tier II accounts.

4.2. Exit and Withdrawal on retirement: A subscriber can exit from the NPS on reaching the age of 60 or superannuation or retirement .He/She can withdraw upto 60% of the corpus and a minimum of 40% of the corpus to buy an annuity from the approved annuity service providers which will provide the monthly pension. The subscriber can also opt for continuation of NPS account till the age of 75 years and can contribute too. The facility of SWP is now available for withdrawal from NPS.

4.3. Premature withdrawal: After the completion of five years, subscribers can prematurely withdraw a maximum of 20% of the corpus as lumpsum and a minimum of 80% of the corpus has to be utilised for purchasing an annuity plan for receiving the pension.

4.4. Death Before 60: The nominee can get 100% of NPS fund in lump-sum.

5. Taxation Implications: The NPS comes under Exempt, Exempt, partly Exempt partly Taxable regime. This refers to the tax implications at the stage of making a subscription to the NPS, earning returns on the contribution and withdrawing the accumulated wealth (withdrawal is partly taxable).

• NPS Tier I Account Tax Benefits:
• The subscriber is allowed a deduction at the time of making the investment:

i) Section 80CCD (1):

• Self-contribution of up to ₹ 1.5 lakh can be claimed as part of the NPS tax deduction under 80CCD(1).
• This limit of ₹1.50 lakhs covers the deductions available under section 80C, 80CCC and 80 CCD (1).

ii) Section 80CCD(1B):

• Additional deductions of up to ₹ 50,000 can be claimed for self-contribution which is separate from the deduction available under Section 80C.

iii) Section 80 CCD (2):

• Salaried individuals under this NPS deduction section. It covers the employer’s NPS contribution, which will not from a part of Sec 80C but covered under section 80CCD(2)
• This benefit is not available for self-employed taxpayers.
• The maximum amount eligible for deduction will be the lowest of the following:

(i) Actual NPS contribution by employer

(ii) 14% of Basic and DA for central government employees or 10% of Basic + DA for other employees

(iii) Gross total income.

• There is no taxation when the income or return is earned on the contributions made. At the stage of exit on maturity, there is no tax on a maximum of 60% withdrawn as lumpsum section 10(12A):
• The balance 40% has to be compulsorily used to buy an annuity from a life Insurance company.
• The annuity will be taxable at the applicable rates in the year in which the annuity is due.
• NPS Tier II Account Tax Benefits
  • There are no restrictions on making withdrawals from this account. But to open a Tier II account, you must have a Tier I account.
  • Currently, there are no tax benefits in Tier II Account Except Govt. Employees.

6.  How to Invest in NPS?

PFRDA offers two ways (1) An Online: Visit eNPS portal. (2) An Offline: Visit any Point of Presence (PoP) entity and submit the filled application form with relevant documents.

7. Option to change the Scheme or Fund Manager

NPS provides its subscriber the options to change the pension scheme or the fund manager,once in a financial year, if the subscriber is not satisfied with the performance of the fund.This option is available for both Tier I and Tier II accounts.

All subscribers or employers under ‘All Citizen Model’ and ‘Corporate Model’ have the option to change the investment choice/ asset allocation (i.e. changing between Auto Choice and Active Choice or to change the allocation ratio among asset classes under Active Choice) four times in a financial year.

For Tier II Accounts, subscribers across all sectors (i.e. Government Sector, all citizen model and Corporate model) will have the above choices.