A few days ago I was enjoying the rainy weather with fresh donuts and coffee, when I got a call from my friend Shivani. She works in a bank and does most of the financial planning for her clients- and wanted to discuss NPS with me . Normally this would sound like a marketer trying to sell product to a customer, but I knew she wouldn’t suggest this to his customers something untill she herself didn’t believe as a good go.
The product she talked to me about was – New Pension Scheme. Yes, it is a pension scheme and it is an initiative of the government. Not all of us have the luxury ,like our parents, who were having government job that comes with a slew of perks and an assured pension when they retire from it. So for people like you and me- working for private companies, own startup or public sector undertakings this plan is a golden way of ensuring that we have a steady flow of income after our working days are over.
NPS Changes -New Rules – December 2018 – Applicable from 1st April 2019
The govt made 5 changes to NPS in December 2018 which would be applicable from 1st April, 2019.
- You can withdraw 60% corpus as tax free on retirement. Previously it was 40% tax free and 20% taxable. 40% has to be mandatory used for buying annuity.
- Government employer will contribute 14% in NPS account. Earlier it was 10%.
- Investment in Tier 2 account would be eligible for 80C deduction( Do not know, how will it happen as withdrawal is allowed in Tier 2 Accounts)
- Interest would be paid out if there is a delay in payment from NPS account.
- Government employees can choose their own asset allocation, earlier it was 15% equity.
What is a New Pension Scheme in India – NPS Meaning?
Like every time, lets start with the basics. New Pension Scheme (NPS) in India is a pension scheme regulated by Pension Fund Regulatory and Development Authority (PFRDA).
Now, The name has been changed to national pension system. Is NPS is an excellent way of saving for your retired life? This scheme allows you to invest in equities and debt instruments during your working life to save money for the rainy day. Since this scheme has the lowest charges, it may not ensure you the best returns on your investment.
I know, it’s a little confusing. Whether it is an investment scheme or retirement? Well it’s both. Imagine what happens after you retire from your IT job at 60 years of age and suddenly your monthly salary drops to zero. Surely you’ll have enough savings and provident fund till then but that corpus will be used for other purposes as well- like paying off your Home EMI, your child’s education, marriage and what not. And dare I mention the rising health concerns, along with the sky rocketing health care prices.
What if you could set aside a small amount every month, which would accumulate to a corpus at the end of your retirement and then be paid back to you in monthly installments as pension. It’s basically another cut out of your in hand income- for the purpose of retirement income.
That is where NPS comes in. Let me tell you how it works- features and returns, redemption options etc.
New Pension Scheme – Salient Features
How does the New Pension Scheme Work?
You will get a Permanent Retirement Account Number (PRAN) when you are joining the NPS. This number will not change for the rest of your life. It is your identification for all purposes of NPS.
What is TIER I and TIER II Account In NPS
NPS offers two accounts for the purpose of investment as below.
Tier-I Account: This is the primary account where you have to save money for your retirement. There are many restrictions in withdrawing money from this account. We will discuss more about this later.
Tier-II Account: This is an optional facility. You can freely withdraw your money from this account. This account exists so that you can invest in NPS as a pure investment instrument.
Investment Options in NPS
In NPS, there are 2 investment options. They are:
- Active Choice
- Auto Choice
In this option, you can decide as to how your NPS contribution is to be invested.
There are 3 options:
- Option E: In this option, your money will be invested mainly in equities. The risk associated with equities applies to this. But as per the guidelines, the investments will be in shares which form part of indices like Nifty and Sensex.
- Option C: In this option, the investments will be in debt instruments. Naturally, you can expect less returns from these.
- Option G: In this option, the investments will be in fixed income instruments like Gilts. This offers low risk and low returns.
In Active Choice, you can decide investment pattern in the above 3 options as per your choice. You can even invest 100% in Option C or G. But the investment in Option E is capped at 50% currently but may be increased to 75% in near future. You have the option of changing the choice later on.
If you cannot decide your investment choice, then you can opt for Auto Choice option.
Here, the investments will be in a Lifecycle Fund. Your investment will be spread across all the 3 choices stated earlier. The percentage allocation to each of these options will be decided based on your age as given below:
Aggressive – 75% of investments in Option E till age 35, declines to 15% by age 55
Moderate -50% of investments in equities till age 35, declines to 15% by age 55
Conservative -25% of investments in equities till age 35, declines to 5% by age 55
By this activity, the Fund Manager ensures that your amount is protected from any last minute volatility of the equity market.
How to join in New Pension Scheme?
Most leading banks are acting as POPs. You can join the NPS Scheme by submitting the Registration Form (UOS-S1) to the POP-SP of your choice. The registration form is available from POP-SPs. Or you can get it from the website of PFRDA (www.pfrda.org.in). You can make your first contribution at the time of applying. Once you open your account, CRA shall mail you the Welcome Kit containing your Permanent Retirement Account Number (PRAN). You will also get an Internet Password (IPIN) for accessing your account on the CRA Website.
What is the minimum contribution to NPS?
Minimum payment per deposit – Rs. 500
Minimum payment per year – Rs. 6,000
You should make at least one contribution in a year. Or you will have to pay a penalty of Rs. 100/- per year to regularise the account. There is no upper limit for your contribution.
Can we withdraw NPS amount?
Yes, we can withdraw NPS amount. There are 3 types of withdrawal options in NPS Tier 1 account
- Partial Withdrawal
- Premature Withdrawal
- Withdrawal on Maturity
NPS Partial Withdrawal Rules – Tier 1
There are restrictions in withdrawal till the age of 60. You can withdraw only 25% of the accumulation in lump sum that too if you for some specific purposes like
- Child Education and Marriage,
- Construction or purchase of first property,
- Amount required for critical illness for self or immediate family etc.,
The NPS partial withdrawal rules are applicable if you are withdrawing before age 60.
NPS Calculator in Excel – Download
Please click on the below mentioned link to download NPS calculator in Excel:
NPS Maturity Withdrawal Rules
After maturity at age 60, you can withdraw up to 60% of the accumulation in lump sum and the rest 40% by way of annuities.
If the lump sum amount at the time of maturity is less than 2 Lakhs, you can withdraw 100% amount.
But the nominee gets the corpus in lump sum in case of death of the member anytime.
These restrictions for withdrawals are only for Tier-1 account.
You can withdraw freely from Tier-2 account.
Can I Exit from NPS – Premature Withdrawal Rules
Yes, you can exit from NPS before age 60, but only after the completion of 10 Years.
You can withdraw only 20% of the accumulation in lump sum and the balance has to be utilised to buy an annuity from any of the annuity provider, if you are withdrawing before age 60.
If the corpus amount is less than 1 Lakh, you can withdraw the entire amount.
Charges in New Pension Scheme
This scheme is having the lowest charge among such investment options. The annual fund management charge as low as 0.25% only.
Other than this, there is an annual maintenance charge of Rs. 190/- to the CRA and transaction charges like Rs. 20/- per transaction which is nominal.
Is NPS Taxable
No, NPS is not taxable.. The contribution made and gains are tax free. But on maturity only 60% corpus is tax free. It comes under Exempt-Exempt-Exempt(E-E-E)
Is NPS included in 80c?
Yes, NPS is included in 80C. You can claim deduction maximum upto 1.5 Lakhs under Section 80C. Investment in Tier-2 is also eligible for tax dedcution under 80C according to latest rules.
What is Section 80ccd (1B)in NPS?
Under section 80 CCD (1B) if an employer or self employed person contributes up to 10% of the salary to the NPS account, would be eligible for tax deduction upto Rs. 50,000 in addition to deductions allowed under Section 80C.
The amount paid to NPS will qualify for deduction under 80CCD. Along with 80C and 80CCC, the limit for this is capped at Rs. 2 lakhs.
Is NPS maturity amount taxable?
NPS maturity amount is tax free upto 60% of accumulated amount. Remaining 40% has to be compulsory used to buy an annuity plan.
The annuity from NPS Scheme is taxable.
Is NPS compulsory?
Yes, NPS is compulsory for all the government employees joining after 2004. During 2004-2009, the scheme was available only for government employees. Now the scheme is open to all since 2009.
Can I have more than one NPS account?
Yes, you can have more than one NPS account. You can have Tier 1 as well as Tier 2 Account. But to open Tier 2 account, it is compulsory to have PRAN and Tier 1 account
Can NRI open NPS account in India?
Yes, NRI can open NPS account in India.
Is NPS best for retirement?
New Pension Scheme can help investors to create retirement corpus. By capping the equity exposure , the risk is less in the scheme. Lifecycle Fund can still reduce the risk of equity in New Pension Scheme.
Though government employees can`t do much about it, as NPS is compulsory for them. I do not think the scheme is best for retirement for other people. If you want to invest in equity, mutual funds are way better than NPS. Also Liquidity is better in mutual funds.
Also, there is misconception among many investors that the government is going to give them the pension. No, the government will not give you the pension. You only would have to choose between annuity schemes available at that point of time. Immediate annuities at this point of time do not give returns more than 6%, think about 10-15 years.
What is your View on NPS ? Please share.