NATIONAL PENSION SYSTEM (NPS)

NPS was introduced by GOI in 2004 for Govt Employees. Later, it was extended to all the employees in 2009 to provide them with Retirement Benefits. While NPS has been primarily designed to provide retirement security through attractive investment options accessible during the working years and flexible pension drawing solutions available in the retirement years, it is a great tool for tax exemption.

ELIGIBILITY

Any Indian Citizen from the age group of 18 to 70 years can open NPS Account. NPS is now made available for Overseas Citizen of India (OCI). OCI will be considered at par with Non-Resident Indian (NRI) while subscribing to NPS (subject of RBI and FEMA guidelines). The option of the NPS Tier II account will not be available for both NRI & OCI Subscribers.

Who is NOT eligible to join NPS?

• HUF
• Cannot be opened as a Joint Account
• Multiple NPS account not possible
• Person working in Armed Force

Types of NPS Account

Tier 1

It is also referred to as the Pension Account. Withdrawals are subject to some conditions. Minimum contribution at account opening & per contribution is Rs.500 while the minimum contribution per year is Rs.1000 for ALL CITIZEN model. As far as tax benefits are concerned, upto 1.5L (10% of Salary or 20% of GTI in case of self-employed) is available under 80CCD (1). An additional 50k is available under 80CCD(1B). Apart from that, Employers contribution is allowed as deduction u/s 80CCD (2) while computing Employees Total Income. However, the amount of deduction cannot exceed 14% of Salary in case of central Govt Employee and 10% in case of any Other Employees.

Tier 2

These are voluntary & are also referred to as Investment Account. Minimum contribution at account opening is Rs.1000 & per contribution is Rs.250 while the minimum contribution amount to be made annually does not have any limit for ALL CITIZEN model. A tax deduction of 1.5L is available only for the govt employee (with lock-in of 3 years) . In general, they don’t offer much tax benefits. Here, there are no restrictions on withdrawals and subscriber can withdraw funds anytime.

ASSET CLASSES

• Equity
• Govt Securities
• Corporate Bonds
• Alternate Investments

There are two kinds of choices available in NPS viz, Auto Choice and Active Choice.

AUTO Choice

It is designed for subscribers who don’t want to take asset allocation decision. The only choice to make here is the type of Lifecycle Fund they choose from i.e., Aggressive LCF where 75% of corpus is in equities till 35 years and gradually reduces thereafter, Moderate LCF (50%), Conservative LCF (25%). Rebalance happens automatically on subscriber’s birthday.

ACTIVE Choice

It is designed for subscribers who want to define their own asset allocation. It is important to note that Equity allocation is capped at 75% whereas Alternate Investments are capped at 5%.

PFRDA allows to switch from Active to Auto or vice versa once in a FY.

PENSION FUND MANAGERS (PFM)

 Subscribers have 10 PFMs to choose from (3 PFMs for Govt Sector Employees) as of 2023. They can have different fund managers for their Tier 1 & 2 accounts. However, one cannot choose different fund managers for different asset classes within the same Tier. For example, if one chooses HFDC Pension Management as their PFM for Equity in Tier 1, they cannot choose ICICI Pension Management for say Corporate Debt in Tier 1 even if their performance is better than HDFC in that particular asset class. Given this limitation, the selection of PFM must be done on a PORTFOLIO basis. As a portfolio, NPS returns are in 10-11% range over the last 5 years since 2023. The PFMs can be changed once a year whereas asset allocation can be changed 4 times in a year.

WITHDRAWALS

PARTIAL Withdrawal (i.e., Subscriber want to partially exit before the age of 60)

For the first 3 years, withdrawals are NOT permitted (lock-in). After that, upto 25% of OWN contribution can be withdrawn only for specific reasons like treatment of critical illness, higher education of children, marriage of children, purchase or construction of residential house. A maximum of 3 withdrawals is possible in the entire tenure. Also, a gap of 5 years needs to be maintained between two withdrawals. Partial withdrawal from Tier 1 accounts is tax free.

PRE-MATURE Withdrawal (i.e., Subscriber want to entirely exit before the age of 60)

A maximum of 20% corpus can be withdrawn as lumpsum which is tax free. The balance of minimum 80% needs to be utilized in purchasing an annuity which would be taxable at the time of receiving pension payouts. If the corpus is less than Rs.2,50,000 then the entire corpus can be withdrawn. However, you can exit NPS only after completion of 5 years. In case of pre-mature exit, pension starts immediately, if the subscriber fulfils the age and corpus criteria for purchasing annuity (depending upon choice of ASP and Annuity scheme of the respective Annuity Service Provider).

OPTIONS when subscriber reaches the age of 60 (i.e., upon Superannuation)

• Defer withdrawal to age 75 & CONTINUE
• Defer withdrawal to age 75 but STOP
• Exit NPS at the age of 60 in which case a maximum of 60% corpus can be withdrawn as lumpsum which would be tax free, and the balance (minimum 40%) has to be utilized to buy annuity which is taxable at the time of receiving monthly payouts in the form of pension. If the total accumulated corpus is upto 5L, then subscriber can opt for 100% lumpsum withdrawal.

ENROLMENT into NPS

• OFFLINE

1. Visit any Point of Presence (think nearest bank branch or Post Office)
2. Submit account opening form
3. Furnish KYC Docs
4. Passport Size Photograph
5. Bank Details
6. Nomination Details
7. Submit 1^st Contribution Slip

• ONLINE (Can be opened in like less than 30 minutes)

1. Log onto to enps.nsdl.com (or any other app or website that offers NPS Account Opening)
2. Complete account opening form
3. Enable KYC verification via Aadhar or upload scanned copy
4. Upload the required documents.
5. Make 1^st Contribution Online

Regardless of whether you for the online or offline method, the system will generate Permanent Retirement Account Number (PRAN)

SPECIAL POINTS

• In case of NPS Tier 1, you enjoy an Exempt-Exempt-Exempt (EEE) status which would mean:

1. The money that you invest is eligible for certain tax deductions.
2. The accumulation stage where money keeps growing while you remain invested is tax free as well.
3. Lastly, the corpus that you can withdraw at retirement (upto 60% after attaining the age of 60) is tax free. The balance 40% which is mandatorily annuitized is tax free as well. However, the payouts that the investor will receive in the form of pension in the future years will be taxable as per the income tax slab applicable in that year.

• It is possible to move funds from NPS Tier 2 to NPS Tier 1. It is also possible to move funds from the EPF Account to NPS Tier 1. Also, a loan against NPS is not possible.

• If a nominee receives any corpus from NPS on death of the subscriber, then it is tax free. Nominee can also be updated via E-NPS & a subscriber can have upto 3 nominees on one’s account.

• NPS returns are NOT fixed but are market linked. It really depends on your asset allocation & how the PFM has performed.

• Docs that is required to be submitted along with withdrawal forms would be, Attested copy of proof of identity like Aadhar, Passport, etc., Attested copy of proof of address like Aadhar, Passport, etc. & cancelled cheque.

• Annuity Service Providers (ASPs) are responsible for providing a regular monthly pension to the Subscriber after exit from the NPS. These ASPs are basically Insurance Regulatory and Development Authority (IRDA) regulated Insurance companies which are empanelled by PFRDA to provide Annuity services to the NPS Subscribers. An annuity is a contract (b/w you & Life Insurance Co.) with a fixed rate of return giving the annuity holder (retiree) predictability in income (pension). Currently, there are 14 Annuity Service Providers (ASPs) empaneled and a host of annuity plans to choose from.

• The pension amount can be calculated based on indicative annuity rates (subject to change from time to time) provided by ASPs. However, the actual annuity amount will depend on the prevailing rates at the time of purchase of annuity. You may visit “Annuity Service Provider (ASP)” page on NPS Trust website to get the tentative pension amount. Alternatively, you may also visit the respective ASP’s website to the tentative pension amount.

• Facility of phased Withdrawal is available for NPS Subscribers. Subscriber can opt for withdrawal of lump-sum amount in a phased manner (up to 10 instalments) over the period from 60 years (or any other retirement age as prescribed by the employer) to 75 years. However, Subscriber has to buy Annuity prior to Phased Withdrawal.