National Pension Scheme

National Pension

The National Pension System (NPS), earlier known as New Pension Scheme is a pension system open to all citizens of India. The NPS invests the contributions of its subscribers into equities and debt and the final pension amount depends on the performance of these investments. Any Indian citizen from the age of 18-65 can open an NPS account. The NPS matures at the age of 60, but can be extended till the age of 70.

Partial withdrawals up to 25% of your contributions can be made from the NPS after three years of account opening for specific purposes like home buying, children’s education or serious illness.

NPS Returns

NPS does not have a fixed interest rate. Instead, your money in the NPS account is invested in up to 4 asset classes – equities, corporate bonds, government bonds and alternative assets through various pension funds. These pension funds earn returns linked to the performance of stocks and bonds. Normally After 3 years its range from 10-18% p.a.

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 under Section 80CCD (1B) up to Rs 50,000 per annum. On maturity at the age of 60, 40% of the corpus is tax free and can be withdrawn.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 The balance 20% can either be used to buy an annuity or can be withdrawn after paying tax.

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.

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).

That depends on your risk appetite. If you are not sure of it, simple select an NPS lifecycle fund. These funds will automatically set your asset allocation according to your age and rebalance it every year.

Under National Pension System, you can follow either pick your own asset allocation or outsource it to the NPS schemes. In Active Choice, you pick your own split between equities, corporate bonds, government bonds and alternative assets. However the allocation to equities cannot be more than 75% of the corpus. In Auto Choice, the lifecycle fund that you have chosen does this 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.

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 2 account are fully taxable at slab rate. Government employees can get a tax deduction on their investment in the NPS Tier 2 account. However in this case, there is a lock-in of 3 years. They can withdraw their entire NPS Tier 2 investment thereafter.

You can also go for 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.

This depends on the performance of your NPS funds. Your contributions invested in the National Pension System are invested in assets like equity or debt and earn returns. Your corpus is thus expected to steadily grow over time. When you hit the age of 60, you can use the accumulated corpus to buy an annuity (monthly pension). The actual pension you get thus depends on the corpus size and the prevailing annuity rates. For example if your corpus is Rs 1 crore and the prevailing annuity rate for a simple annuity is 8%, you will get an annual payment of Rs 8 lakh. This translates to a monthly pension of Rs 66,666.

An annuity is a fixed payment that you get for the rest of your life in return for paying the annuity provider a lump sum amount. For example paying the annuity provider Rs 10 lakh may get you an annuity of Rs 75,000 per year for the rest of your life. There are many different types of annuities. An annuity simple pays you a sum of money for the rest of your life and terminates thereafter. If you die early, the annuity provider (typically an insurance company) may get to keep a higher amount than what it has paid you.

However the annuity provider also bears the risk of you living longer than expected and it having to pay you a lot more than the lump sum you have paid. Another type of annuity called annuity certain pays a sum of money for a defined period (say 10-15 years) even if you die before this period. The sum of money will be paid to your nominees. Yet another type is called annuity with return of purchase price. In this type of annuity, your nominees are paid back the price (lump sum) you have paid to buy the annuity, upon your death. In general, the more favourable the annuity features, the lower the annuity rate is.

Currently, there are five Annuity Service Providers (ASPs) which provide annuity services to NPS subscribers. These are LIC, SBI Life Insurance Co. Ltd., ICICI Prudential Life Insurance Co. Ltd., HDFC Standard Life Insurance Co. Ltd., and Star Union Dai-Chi Life Insurance Co. Ltd.

Tax Baniya
National Pension Scheme
In India
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