Tax Saving Scheme, Retirement Planning

Established under the PFRDA Act of 2013, The National Pension System (NPS) is administered and controlled by the Pension Fund Regulatory and Development Authority (PFRDA).

What is NPS

The National Pension System (NPS), earlier known as the New Pension Scheme, is an open pension system accessible to every citizen of India.

The NPS puts its subscriber money into instruments linked to markets, including equities and debts, and the final pension amount is contingent upon the results of those investments.

Anyone Indian citizen who falls within the age range of 18-60 is eligible to sign up for an account with an NPS account.

The NPS will mature at 60; however, it is possible to extend it until 70.

Eligibility requirements for enrollment in the NPS

Following are the conditions under which you are eligible to invest in NPS:

  • You are a citizen of India (resident or non-resident)
  • You are between 18 to 70 years of age as on the date of submission of your NPS application.
  • You comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form.

Below are the certain condition can not eligible to invest in NPS:

  • Undischarged insolvent
  • Individual of unsound mind
  • Pre-existing account holder under NPS

Investment Choice and NPS Allocation of Assets Allocation

Under the National Pension Schemes, you can choose your allocation of assets (Active Option) or transfer this to the NPS funds manager (Auto option). It is suggested to go with Auto Choice until you have sufficient knowledge and experience investing in market-linked investment choices.

Active Choice

When using Active Choice, the subscriber chooses the best portion of his NPS deposits among equities bonds, corporate bonds, government bonds, and other assets. The NPS subscriber must provide pension fund managers (PFM) and the asset allocation matrix, and the percentage allocations to be applied for the various asset classes of NPS.

Auto-Choice

In Auto Choice, the lifecycle fund you’ve selected will manage the allocation of assets on your behalf (the maximum amount of equity allocated is 75%). The fund will also automatically adjust your allocation of assets as you age towards less equity and greater debt.

You can change your allocation of assets up to twice during a fiscal year. Asset class A (Alternative Assets) is available only in NPS Active Choice.

Different types of NPS Accounts

NPS provides two type of accounts, including Tier-I and Tier II.

Tier I Account:

Tier-I is the pension account that has limited withdrawals.

  • This account can be used to claim a tax-free deduction for Section 80CCD (1B) that is up to 50,000 annually.
  • It is a non-withdrawable retirement account. At the completion time, i.e., when you reach 60, sixty percent of the tax-free account may be taken out.
  • Another 40% must be used to purchase an annuity.
  • The remaining 20% of the funds can purchase an annuity or be taken out after paying tax.

Tier II Account:

Tier-II accounts are a voluntary one that provides liquidity for investment and withdrawals.

  • This is a voluntary retirement-cum-savings account that can be opened only if you have a Tier I account.
  • The account holders can invest or withdraw funds at their convenience. The account does not offer tax benefits, except for private-sector employees or self-employed people.

Feature of NPS

  • Tier I: Pension Account (Mandatory A/C ) – Tax benefits available)
  • Tier II: Investment Account (Optional A/C – There is no tax advantage; however, the money can be withdrawn at any time)
  • The minimum contribution during the opening of an A/C will be Rs.500 to Tier 1
  • The minimum contribution during opening an A/C can be Rs.1,000 in Tier II.
  • A low-cost product, with Fund Management Charges of 0.03-0.09, 0.03 to 0.09 percent.
  • Attractive market-linked returns
  • Flexible across geographical and job locations.
  • Continued participation in the NPS scheme after retirement – The option to contribute up to 75 years of age or delay withdrawal until 75 years.
  • Complete withdrawal of corpus smaller than Rs.5 lacs – If the total corpus accumulated does not exceed Rs.5 Lacs when reaching 60, the subscriber can withdraw the whole corpus.
  • The flexibility of investments Subscribers can choose the pension Fund Manager (PFM). The subscriber can change PFM at any time during the Financial Year. Subscribers can also define their allocation of assets, which can be altered four times during an entire Financial Year.

NPS Return:

NPS does not have a fixed interest rate but the returns are market-linked (its replica of mutual fund).

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.

What is Interest Rate in NPS?

NPS is not Fixed Deposit Investment. That why NPS not pay any interest to subscriber.

Pension Funds listed under NPS

Following pension plans are registered under NPS:

Method to Open an NPS Account

Individuals can create an NPS account online or offline. Here is how to create an NPS account online as well as offline:

Online procedure:

You must follow the steps below to create the NPS Account online:

  • Step 1: Visit the eNPS website
  • Step 2: Fill up your basic details for “Registration.”
  • Step 3: The mobile number, Your Name as per Aaddhar PAN, and email id.
  • Step 4: Check the validity of the account by using the OTP that will be delivered to your registered mobile. Compete further process of Form
  • Step 5: When you have completed the registration process, you’ll be issued the Permanent Retirement Account number, also known as a PRAN. The PRAN will be used at any time to sign in to your account.

Offline procedure:

You’ll have to go through the procedures outlined below to establish the NPS online account.

  • Step 1: Find the closest Point of Presence (PoP) center, a bank, or a post office, to establish an account with an NPS account. (for Pune Region contact us)
  • Step 2: You must submit your Know Your Client (KYC) documents and the completed, filled out, and signed application form.
  • Step 3: The PoP center will issue you a PRAN when you have completed the first deposit.
  • Step 4: PRAN and the password will be included inside the kit that you receive upon registering. The PRAN and the password will be necessary to use your account.

Check your NPS balance on the internet:

  • Step 1: Log in to your account using your PRAN.
  • Step 2: Click on the ‘Transaction Statement.’
  • Step 3: The ‘Holding Statement and the “Transaction Statement are available for download via the dropdown menu.

NPS Withdrawal Process

Rule of Exit and earlier withdrawals within NPS: 

Subscriber must invest in NPS until they are 60 years old because NPS can be viewed as a retirement fund.

However, in certain instances, subscribers can take out at least 25% of the investment amount if they have deposited into the account for 3 years.

Here are the different situations where early withdrawal is permitted:

  • If the children of the subscriber are getting married,
  • For further studies,
  • To purchase or build the home
  • In the event of medical treatment of the subscriber or family members

A withdrawal from NPS is permitted up to three times in the scheme.

However, there should be a minimum of five years between withdrawals.

Refund after reaching the 60-year-old of age: 

The entire investment made in the scheme can’t be taken out of the scheme once a subscriber is sixty years old.

It is required that subscribers keep at 40 percent of the amount invested in being eligible for pension.

The pension is provided to the subscribers by an insurance company recognized as a member of the PFRDA.

A further 60% of the pension can be taken out, and there is no tax to be paid.

The documents required for withdrawal of NPS Amount:

Below is a list of documents to be provided to take the funds from NPS:

  • Form for withdrawal
  • Original PRAN card
  • Identity proof that has been authenticated must be provided
  • A cheque that has been cancelled must be presented

Conclusion

NPS Tier I account is best for Tax Saving Purpose. Only NPS allow to save Tax 50,000 under 80CCD(1B).

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