I have had great experience with Innov-Wealth, who meticulously made a financial plan aiding me in my journey towards financial independence. I would further like to commend them for their use of their platform and overall processes.
The National Pension System (NPS), earlier known as the New Pension Scheme, is a pension system open to all citizens of India. The NPS invests the contributions of its subscribers into various market-linked instruments such as Equity and Debt and the final pension amount depends on the performance of these investments. It has an applicable interest rate of 9% to 12% on contributions made.
Any Indian citizen in the age group of 18-60 can open an NPS account. NPS is administered and regulated by the Pension Fund Regulatory Authority of India (PFRDA). The NPS matures at the age of 60 but can be extended until the age of 70.
Partial withdrawals up to 25% of your contributions can be made from the NPS after three years of account opening but for specific purposes like home buying, children’s education, or serious illness.
NPS Asset Classes
The National Pension System has four asset classes. Asset Class E invests in equities or stocks. Asset Class C invests in Corporate Bonds. Asset Class G invests in Central and State Government Bonds and Asset Class A invests in alternative assets like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs).
Investment Choice & NPS Asset Allocation
| Class | Investment Asset |
|---|---|
| E | Equity |
| C | Corporate Bonds |
| G | Government Bonds |
| A | Alternative Assets like REITs & InVITs |
Under National Pension Schemes, you can either pick your own asset allocation (Active Choice) or outsource it to your NPS Fund Manager (Auto choice). It is recommended to opt for Auto Choice until you have good knowledge and experience of investing in market-linked investment options.
Active Choice
In Active Choice, the subscriber picks the desirable split of his NPS deposits between equities, corporate bonds, government bonds and alternative assets on his own. The NPS subscriber needs to provide Pension Fund Managers (PFM), asset allocation matrix and the percentage allocation to be done to each of the asset classes of NPS.
Out of the 4 asset classes i.e equity, corporate bonds, government bonds & alternative assets, the allocation to equities cannot be more than 75% of the corpus and that too is valid only up to 50 years of age. From 51 years onwards the allocation to equity starts tapering off as per a defined matrix. Similarly, your contribution towards Alternative Investment Funds (AIF) can not be more than 5% of your corpus.
Equity Allocation Matrix in Active Choice:
| Age | Max. Equity Allocation |
|---|---|
| Upto 50 years | 75% |
| 51 years | 72.5% |
| 52 years | 70% |
| 53 years | 67.5% |
| 54 years | 65% |
| 55 years | 62.5% |
| 56 years | 60% |
| 57 years | 57.5% |
| 58 years | 55% |
| 59 years | 52.5% |
| 60 years | 50% |
Auto Choice
In Auto Choice, the lifecycle fund that you have chosen does the asset allocation process for you (maximum equity allocation is again 75%). The fund also automatically rebalances your asset allocation as you get older towards less equity and more debt.
You can change your asset allocation up to two times in a financial year. Asset Class A (Alternative Assets) is only offered in NPS Active Choice and the upper limit for investing in it is 5% of your corpus.
Please see the table below for asset allocation in each life-cycle fund:
| Aggressive | Conservative | Moderate | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Age | E | C | G | E | C | G | E | C | G |
| Upto 35 years | 75% | 10% | 15% | 25% | 45% | 30% | 50% | 30% | 20% |
| 40 | 55% | 15% | 30% | 20% | 35% | 45% | 40% | 25% | 35% |
| 45 | 35% | 20% | 45% | 15% | 25% | 60% | 30% | 20% | 50% |
| 50 | 20% | 20% | 60% | 10% | 15% | 75% | 20% | 15% | 65% |
| 55 | 15% | 10% | 75% | 5% | 5% | 90% | 10% | 10% | 80% |
| Asset Class | E = Equity | C= Corporate Bonds | G= Government Bonds | ||||||
NPS Returns
NPS does not have a fixed interest rate but the returns are market-linked. Money contributed to the NPS account can be invested in up to 4 asset classes – equities, corporate bonds, government bonds and alternative assets through various pension funds.
Types of NPS Accounts
- Tier I Account: This account carries a tax deduction under Section 80C up to Rs 1.5 lakh per annum and an additional amount up to Rs 50,000 per annum under Section 80CCD (1B).
- This is a non-withdrawable permanent retirement account. On maturity i.e at the age of 60, 60% of the corpus which is tax-free can be withdrawn. Another 40% must mandatorily be used to buy an annuity. The balance 20% can either be used to buy an annuity or can be withdrawn after paying tax. However, as per the announcements made in the Union Budget 2019, the NPS corpus that can be withdrawn at the time of retirement i.e 60% of the total accumulated corpus would be tax-exempt from FY 2020-21. The move makes NPS at par with other saving schemes such as PPF and EPF in terms of tax treatment.
- Tier II Account: This is a voluntary retirement-cum-savings account that can be opened only if you have a Tier I account. Subscribers are free to invest or withdraw their funds anytime according to their convenience. This account has no tax deductions, for private-sector employees or self-employed persons.
- While presenting Union Budget 2019, the finance minister Nirmala Sitharaman announced that from FY 2020-21, tax benefits can be claimed on Tier II accounts contributions but with lock-in period, thus making it at par with Equity Linked Saving Schemes (ELSS).
NPS Tax Treatment
Tax Benefits on Investment
- NPS subscribers can claim tax benefits on investment upto Rs. 1.5 lakh under section 80C of the Income Tax Act, 1961. The deduction comes under the overall upper limit of Rs. 1.5 lakh under section 80C.
- NPS investors can claim additional tax benefits on investments upto Rs. 50,000 over and above the limit of Rs. 1.5 lakh under section 80CCD (1b).
- Over and above the investment limit of Rs. 1.5 lakh under section 80C and limit of Rs. 50,000 under section 80CCD (1b), tax benefits can be claimed on the contributions from the employer upto 10% of the basic salary of the employee under section 80CCD (2). This deduction is available only for employees and there is no upper limit on that.
Tax Benefits on Returns
- NPS returns are market linked and therefore returns depend on the performance on broader market performance. However, returns earned on NPS investments are entirely tax exempt.
Tax Benefits on Maturity
- NPS account matures at the age of 60. However, only 60% of the accumulated corpus can be withdrawn at the time of maturity. It is mandatory to invest rest 40% of the corpus in annuity.
- Out of the 60% withdrawn as lump sum, only 40% was tax exempt till now. Rest 20% was taxable as per the income tax slab of the subscriber. However, the government has extended tax benefits on the entire 60% withdrawn as lumpsum at the time of maturity from FY 2020-21 as announced in the Union Budget 2019. This makes NPS a completely tax free investment product.
Which pension funds are listed under NPS?
At present there are 8 fund managers who are managing the deposits of NPS subscribers to maximize returns:
- Birla Sun Life Pension Fund Ltd
- HDFC Pension Management Co. Ltd
- ICICI Prudential Pension Fund Management Ltd
- Kotak Mahindra Pension Funds Ltd
- LIC Pension Fund Ltd
- Reliance Capital Pension Fund Ltd
- SBI Pension Fund Pvt. Ltd
- UTI Retirement Solutions Ltd
NPS Contribution
In NPS Tier 1, the minimum initial contribution is Rs 500. However, the minimum annual contribution to your NPS Tier I account is Rs 1,000. There is no maximum annual contribution. The minimum amount per contribution is Rs 500.
In NPS Tier 2, the minimum initial contribution is Rs 1,000. There is no minimum or maximum annual contribution. The minimum amount per contribution is Rs 250.
NPS Charges
National Pension Schemes is one of the cheapest investment products available with extremely low charges. Pension Fund Manager fees are capped at 0.01% compared to 2-2.5% for mutual funds. Other charges in the NPS are also extremely low as you will notice from the table below.
| Intermediary | Charge head | Service Charges* |
|---|---|---|
| CRA (Central Record-Keeping Agency) | Account Opening charges | Rs. 50 |
| Annual Maintenance cost per account | Rs. 190 | |
| Charge per transaction | Rs. 4 | |
| POP (Point-of-Presence) | Initial subscriber registration and contribution upload | Rs. 100 |
| Initial contribution upload | 0.25% of the initial contribution amount from subscriber subject to a minimum of Rs.20 and a maximum of Rs.25,000 |
NPS Withdrawals
- You can make up to three partial withdrawals from the NPS during the entire tenure of the account.
- The first such withdrawal can be made after 3 years from account opening.
- The maximum amount that can be withdrawn through partial withdrawals is 25% of your contribution. This ceiling applies to all three withdrawals put together. For example, you can withdraw 10%, 10% and 5% in three tranches.
- Partial withdrawals from the NPS are tax-free.
In case of an NPS Tier 2 account, there is no lock-in and hence there is no restriction on withdrawals. However, withdrawals from the NPS Tier II account are fully taxable at the slab rate. As per Union Budget 2019, NPS subscribers can get a tax deduction on their investment in the NPS Tier II account. However, in this case, there is a lock-in of 3 years. They can withdraw their entire NPS Tier II investment thereafter.You can also go for a premature exit after completing 3 years in the NPS. If you choose this option, you can withdraw only 20% of your accumulated corpus and this withdrawal will be taxed at your slab rate. The balance 80% must be used to buy an annuity (regular pension). The annuity will be fully taxable.The NPS account matures at the age of 60. You can withdraw 60% of your accumulated corpus after that age. This withdrawal will be tax-free.
If the subscriber wants to exit from the scheme, he/she have to submit a completely filled withdrawal application form along with required documents to the POP-SP. The POP-SP will forward the form to the CRA (NSDL e-Governance Infrastructure Limited) after authenticating the documents.
The subscriber’s claim will be registered and CRA will forward the application form. The CRA also assists subscribers by providing necessary information about required documents. Once the documents are received and verified, the application will be processed and CRA will settle the account.
