One of the significant changes that are taking place in relation to the retirement benefits is the introduction of the National Pension Scheme (NPS). Let’s understand further!
NPS is a universal defined contribution retirement scheme, funded by employee contributions only. However, the NPS regulator has announced an option described as a payroll deduction, whereby the employer can make contributions on behalf of employees and claim them as a business expense. Meanwhile, the employee may also claim a personal tax exemption for the contribution made by the employer on his behalf. The deduction is available only up to a certain limit specified by the income tax authorities.
Types of NPS:
Tier I: Mandatory, a basic account with limitations of withdrawal as follows:
1. Before attaining 60 years (Before retirement): Only 20%of contribution can be withdrawn while the rest 80% must be necessarily used to buy an annuity from a life insurer
2. After attaining 60 years (After retirement): 60% contribution can be withdrawn and the rest 40% must be used to purchase an annuity from a life insurer
Tier II:Voluntary saving scheme and withdrawal can be limitless
Who can join NPS and what is the process?
- Indian citizens aged between 18-60 years can join NPS. One need to comply with know your customer (KYC) norms! NRI’s can also join NPS, however, the account will be closed if there is any change in citizenship status!
- Several financial entities, private and public banks and other authorized branches are enrolled as a point as presence (POP), at these designated places, anyone between the age bracket of 18-60 can go and open an NPS account! To access the list of all the authorized POP’s near you, you can visit the website of the Pension Fund Regulatory and Development Authority (PFRDA)
- You need to fill in the registration form and submit the necessary document (ID’s) at the POP
- After enrolment in NPS, a 12-digit card is Issued to every account holder which is called a Permanent Retirement Account Number (PRAN)
- You cannot open multiple NPS accounts, limited to only 1 account per person
Management of funds in NPS?
Pension funds manager registered by PFRDA manage the money invested in NPS. The list of fund managers is as follows:
- LIC pension fund
- HDFC pension management company
- ICICI Prudential pension fund
- Reliance capital pension fund
- SBI pension fund
- Kotak Mahindra pension fund
- DSP BlackRock fund
- UTI retirement solution retirement fund
Investment options in NPS:
NPS offers two options:
• Active: Where in the investor decides where the money should be invested from the following option (Either one of the following or a combination)
- Asset E: 50 % investment in stocks
- Asset C: Investment in fixed income instrument other than government securities
- Asset G: Investment in the only govt. securities
• Auto choice: Default option where the money is automatically invested in line with the age of the scheme holder
You can change your investment choices once a year! You can even change your scheme and funds manager as well.
- An employee’s own contribution is eligible for a tax deduction up to 10% of salary- Under section 80 CCD of income tax act with a ceiling of 1.5 lakh under section 80 C and 80 CCE
- NPS is a pension scheme and you are expected to stay invested until your retirement and in case you decide to opt out before 60 years, you can only withdraw only 20% accumulated, rest 80% is used to buy an annuity
- If the scheme holder dies before 60 years, the entire accumulated amount will be paid to the nominee/legal heir
- You can withdraw the money by submitting a withdrawal application to the POP along with all the relevant document
Susheel has been associated with insurance providers and intermediaries for about a decade or so. Worked as sales professional looking into direct B2B marketing, channel marketing, institutional and government contracts. He is also a certiﬁed Happiness Coach, Berkeley method of wellbeing California and wants to help companies have a better and happy workforce, his motivator to create Ethika.