NPS is the Government-backed initiative, which provides retirement benefits to all citizens of India, even from the unorganized sectors. NPS is regulated and administered by the Pension Fund Regulatory and Development Authority under the PFRDA Act 2013. It is a voluntary contribution scheme that is market-linked and managed by professional fund managers.
Contributions made by individual subscribers to the National Pensions Scheme under the system gather until retirement and corpus continues to grow via market-linked returns. Subscribers also have an option to leave this plan before retirement in case of any problem. However, this scheme ensures that a part of savings is used for providing retirement benefits to their subscribers.
Thus, on retirement or exit, at least 40% of the contribution is utilized for getting lifetime pension by the purchase of an annuity. The rest of the amount is paid to the subscriber in a lump sum.
Features & Benefits of NPS
Returns/Interest
Some part of the NPS invests into equities (which may not offer guaranteed returns). However, it offers great returns which are much higher than other traditional tax-saving investments like the PPF.
This scheme has been active for over a decade, and so far it is delivering 8% to 10% returns yearly. NPS also allows to change your fund manager if you are not happy with the performance of the fund.
Risk factor
Currently, the cap is between 75% to 50% on equity exposure for the National Pension Scheme. For government employees, it is 50%. In the range prescribed, the equity portion will start reducing 2.5% each year whenever the investor turns 50 years of age.
However, for an investor whose age is 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 than other fixed-income schemes.
Tax efficiency – NPS tax benefit
The deduction of up to Rs 1.5 lakh is allowed for NPS – for your contribution as well as the employer's contribution. 80CCD(1) includes the self-contribution, which is a part of Section 80C of the income tax.
The maximum deduction allowed under 80CCD(1) is 10% of the salary, but no more than the mentioned limit. For the self-employed person, the limit is 20% of the gross income.
Section 80CCD(2) includes the employer’s NPS contribution, which is not a part of Section 80C and this benefit is not allowed for self-employed persons.
The maximum amount allowed for deduction will be the lowest of the following:
- Actual NPS contribution by employer
- 10% of Basic + Dearness Allowance
- Gross total income
An additional self contribution can be claimed (up to Rs 50,000) under section 80CCD(1B) as NPS tax benefit. Thus, the total tax deduction of up to Rs 2 lakh can be claimed.
Withdrawal Rules After 60
You cannot make the withdrawal of the entire corpus of the NPS scheme after your retirement. You will have to keep aside at least 40% of the corpus to get a regular pension from a PFRDA-registered insurance firm.
The remaining 60% is now tax-free according to the latest update from the government making the entire NPS withdrawal corpus tax-free.
Early Withdrawal and Exit rules
As a pension scheme, it is important for you to keep investing until the age of 60 years. However, if you have been investing for at least three years, you may withdraw up to 25% for certain purposes.
Such withdrawal is allowed for various purposes including children’s wedding or higher studies, building/buying a house or medical treatment of person or his/her family etc. You are allowed to make a withdrawal up to three times (with the gap of 5 years) in the entire tenure.
These restrictions are only for tier I accounts and not for tier II accounts.
Equity Allocation Rules
The NPS invests in various schemes, and the Scheme E of the NPS is for equity investments. The maximum 50% of your investment is allowed for equities. There are two ways for investing in – auto choice or active choice.
The auto choice decides the risk profile of your investments according to your age. The older you are, the more stable and less risky your investments will be. In active choice, you can decide the scheme yourself and split your investments.
Option to change the Scheme or Fund Manager
With NPS, you are allowed to change the pension scheme or the fund manager if you are not happy with their current performance. The option of changing the scheme or fund manager is available for both tiers I and II accounts.
Choice of Pension Fund Manager
The subscriber can choose from 7 Pension fund managers which are appointed by PFRDA (Pension Fund Regulatory and Development Authority of India). Here are the 7 Pension fund managers:
- ICICI Prudential Pension Fund
- LIC Pension Fund Ltd
- Kotak Mahindra Pension Fund
- SBI Pension Fund
- UTI Retirement Solutions Pension Fund
- HDFC Pension Management Company Ltd
- Birla Sunlife Pension Management Ltd.
Documents required for opening an NPS account
- Completely filled in subscriber registration form
- Proof of Identity
- Proof of Address
- Age/date of birth proof
- Cancelled Cheque (if applicable)
You can also open an NPS account online through eNPS portal with following details:
- Aadhaar Card
- PAN card
- Savings account in the authorised bank that verify KYC online
The Process to Register for the National Pensions Scheme
To register and obtain a subscription to the National Pension System through the online platform eNPS, simply follow these steps:
Step 1 – Go to the eNPS portal at the official website of the National Pension System.
Step 2 – Choose your subscriber type from this two options ‘Individual Subscriber’ and ‘Corporate Subscriber’.
Step 3 – Choose your suitable residential status. The options include ‘Citizen of India’ and ‘NRI’.
Step 4 – Opt for either Tier I account type or both accounts because a choosing the former is mandatory for long-term savings.
Step 5 – Enter your PAN card details and select your bank or PoP. It can be good for you if you choose a PoP with whom you are having an existing savings/current/Demat account for KYC verification as the chosen PoP will do it.
Step 6 – Upload the scanned copy of your PAN card and a cancelled cheque. The image format should be in (.jpg, .jpeg or .png) format and a file size should be of 4KB to 2MB.
Step 7 – Now, upload your photograph and signature in the (jpg, jpeg or png) format and size of 4KB to 2MB.
Step 8 – When redirected to the payment gateway, pay the required charges via net Banking.
Step 9 – When payment is done, your Permanent Retirement Account Number will be generated.
While this was the process of completing PRAN (permanent retirement account number) generation for all subscribers, NRIs will have to complete a few additional steps as follows.
Choose the status of the bank account, i.e., either repatriable or non-repatriable.
Provide the details of the NRO (Non-Residence Ordinary) or NRE (Non-Residence External) bank account along with the passport’s scanned copy.
Choose a suitable communication address, i.e. either permanent or overseas address.
Once the PRAN is generated, an applicant will need to proceed for authentication. Authentication can be done in two ways:
E-Sign option for authentication
On the E-sign/Print & Courier page, select the E-sign option.
Authenticate with the OTP which will be sent to the mobile number registered with your Aadhaar card.
The registration form is signed successfully when Aadhaar authentication is done, and you do not need to send its physical copy.
However, if you are unable to complete the online authentication process, here is the alternative option for authentication process.
Authentication via print and courier
Select the Print & Courier option on the initial page.
Print the form available on the page and paste the photograph and signature.
Send the form within 30 days of PRAN allotment to the address given on that form. If you won't send the form in 30 days, it will result in temporary freezing of the PRAN.
Offline Process
To open an NPS account, you will have to find a PoP (Point of Presence) and will have to collect a subscriber form of NPS from your nearest PoP and submit it with required KYC papers.
Once you invest the initial amount (minimum Rs 500 or Rs 250 monthly or Rs 1,000 annually), the PoP will provide you a PRAN (Permanent Retirement Account Number).
You can operate your NPS account with this PRAN number and the password given in your sealed welcome kit. You will be charged Rs 125 for this as a one-time registration process.
No comments:
We welcome encouraging, respectful and relevant comments. Thank You!!