October 1st Celebrated as NPS Diwas: Unlock a Future of Exciting Opportunities

We are celebrating 1st October as NPS Diwas with the aim to encourage every citizen to plan towards creating a pension corpus to secure their and their family future to enjoy financial independence post-retirement. Contributing to NPS gives you tax benefits instantly, the power of compounding, and the benefits of regular income. Let us know something about NPS:

What is the National Pension Scheme (NPS)?

The National Pension Scheme (NPS) is a social security initiative by the Central Government. This pension program is open to all Indian citizens, including employees from the public, private, and even unorganized sectors. Earlier, the NPS scheme covered only Central Government employees.

The NPS scheme holds immense value for anyone who requires a regular pension after retirement. NPS can also be viewed as a dedicated long-term investment plan tailored for retirement with a low-risk appetite. It offers returns that are much higher than other traditional tax-saving investments like the PPF. The scheme has been in effect for over a decade, and so far it has delivered 9% to 12% annualized returns in addition to instant tax benefits.

The Budget 2024-25 proposed for the introduction of NPS Vatsalya, where parents can open an NPS account for their minor children and contribute an amount every month or year until they reach 18 years old. Once the children are 18 years old, they can manage the account independently by converting the NPS Vatsalya account into a normal NPS account.

How it works

NPS is a market-linked defined contribution scheme that helps you save for your retirement. The scheme is simple, voluntary, portable, and flexible. It is one of the most efficient ways of boosting your retirement income and saving tax. It allows you to plan for a financially secure retirement with systematic savings in a planned way. Here is how it works:

1. Upon successful enrollment, a Permanent Retirement Account Number (PRAN) is allotted to the subscriber.

2. Subscribers contribute periodically and regularly to create a retirement corpus.

3. The contributions are invested in a mix of assets, and the returns are market-linked.

4. NPS offers two types of accounts: Tier 1 (mandatory lock-in period until age 60) and Tier 2 (optional).

Eligibility

Any person fulfilling the following eligibility criteria can join NPS:

• Should be an Indian citizen (resident or non-resident) or a non-resident Indian (NRI).
• Should be aged up to 70 years.
• Should comply with the Know Your Customer (KYC) norms detailed in the application form.
• Should be legally competent to execute a contract as per the Indian Contract Act.
• Overseas citizens of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS.
• NPS is an individual pension account, thus it cannot be opened on behalf of a third person.

Investment Management

Your investments in the NPS are managed by pension fund managers available in both the government sector and private sector.

Whatever money you deposit is invested by pension fund managers in equity, corporate bonds, and government securities, and accordingly you get interest on that money.

When you reach the age of retirement, this sum is utilized by you to buy an annuity or a monthly pension plan.

At the time of subscribing for your NPS plan, you get two options: auto choice and active choice.

Auto choice: If you opt for auto choice, your pension fund manager will automatically choose the percentage of your money to be invested in equity, corporate bonds, and government securities.

Active choice: This allows you to choose what percentage of your money will be invested in equity, corporate bonds, and government securities.

It's important to understand that different investments come with different risk capital. The return that a subscriber gets is based on this risk profile.

1. Equity is often high-risk that yields high returns.
2. Corporate bonds come with moderate risk and hence moderate returns.
3. Government securities come with minimum risk and offer a lower return compared to other investment instruments.

Some basic rules of investment via the NPS include:

• You can change your pension fund manager once a financial year.
• Your choice of active or auto choice can be changed twice in a year.
• Asset allocation can also be done twice in a year by you.
• One cannot invest more than 75% in equity. Even your pension fund manager will have to adhere to this rule.

Tax Benefits

A. Instant Tax Benefits

Under Old Regime

1. Self-contribution by employee: Up to Rs. 1.5 lakh can be claimed u/s. 80C and Rs. 50 lakh u/s. 80CCD (1B).

2. Employer Contribution: Rs. 7.5 lakh or 10% of Basic + DA, whichever is lower.

3. Self-Contribution by Self-Employee: 20% of gross total income u/s. 80CCD (1), subject to a total limit of 1.5L, and in addition to this, Rs. 50K u/s. 80CCD (1B).

Under New Regime

Employer Contribution: Rs. 7.5 lakh or 14% of Basic + DA, whichever is lower.

B. No capital gain tax on withdrawal

Advantages of NPS

• Diversification: NPS allows you to invest in different asset classes, potentially yielding good returns. With NPS, you have the provision to change the pension scheme or the fund manager if you are not happy with their performance. This option is available for both Tier I and II accounts.
• Investment options: You can choose between Active and Auto Choice. The auto-choice decides the risk profile of your investments as per your age. For instance, the older you are, the more stable and less risky your investments. The active choice allows you to decide on the scheme and to split your investments.
• Steady flow of income after retirement: NPS provides lump sum returns and pension income.
• Returns/Interest:  This scheme has been in effect for over a decade and so far has delivered 9% to 12% annualized returns. In NPS, you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.
• Risk Assessment: Currently, there is a cap in the range of 50% to 75% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year, beginning from the year in which the investor turns 50 years of age. However, for an investor of the age of 60 years and above, the cap is fixed at 50%. This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe from the equity market volatility. The earning potential of NPS is higher as compared to other fixed-income schemes.
• Regulated: The PFRDA regulates NPS with transparent investment norms, regular performance reviews, and monitoring of fund managers by NPS Trust.
• Flexibility:  The NPS subscription is flexible. NPS subscribers can contribute to the NPS fund at any time in a financial year and change the number of subscriptions. They can choose their own investment options. They can operate their account online from anywhere and continue it even when they change their city and employment.

Early Withdrawal or Exit Rules

• Upon Superannuation: When a subscriber reaches the age of superannuation or reaches the age of 60, he or she must use at least 40% of the accrued pension corpus to purchase an annuity that provides a regular monthly pension. The remaining monies are available for withdrawal as a lump payment.
• Subscribers can take a 100% lump sum withdrawal if their entire accrued pension corpus is less than or equivalent to Rs. 5 lakh.
• Emergency/Partial Withdrawal: You can withdraw 25% of your contribution (excluding employer contribution). In the entire life span, up to 3 withdrawals can be made; the first withdrawal can be exercised after 3 years of account opening. 2nd and 3rd withdrawals can be exercised any time after the previous withdrawal.
• Pre-mature Exit: In the event of a premature exit (before reaching the age of superannuation/turning 60), at least 80% of the subscriber's accrued pension corpus must be used to purchase an annuity that provides a regular monthly income. If the total corpus is less than or equal to Rs. 2.5 lakh, the subscriber can opt for 100% lumpsum withdrawal.
• Upon the death of the subscriber: Following the subscriber's death, the entire accrued pension corpus (100%) would be paid to the subscriber's nominee/legal heir.