ALL ABOUT NATIONAL PENSION SCHEME

National pension scheme (NPS) is an initiative by central government of India which provides regular income to investor post retirement. NPS was launched in year 2004 by  Pension Fund Regulatory and Development Authority (PFRDA).

NPS is open to employees from the public, private and unorganized sectors except those from the armed forces. It was initially covered only for central government employees then PFRDA has made it open to all Indian citizen.

Investors are allowed to invest in NPS on regular basis during investor’s employment period. Investor can take certain amount after retirement and rest investor receives as monthly pension.

Read also: How to invest in Post Office Monthly Income Scheme?

Features and Benefits of NPS

1. Regulated: NPS is regulated by PFRDA (Pension fund regulator under Ministry of Finance, Govt. of India.) which ensures transparent norms governing the activities. NPS Trust ensures adherence to the guidelines through regular monitoring.
2. Return offered by NPS: NPS offers higher return as compared to other tax saving options available like PPF as NPS invests portion in equities.
   So far, since a decade from when NPS has been in effect has given 8% to 10% annualised return. Investor also has freedom to change the fund manager if he is not happy with returns.
3. Risk assessment of NPS: Currently there is a cap between range of 50% to 75%. This cap ranges to 50% for government employees. In prescribed range, equity portion will reduce by 2.5% every year starting from the year in which investor turns 50 years of age. This makes NPS’s safety as equity market is volatile.
4. NPS tax benefits: Contribution made by employer and employee are applicable for tax deduction. Tax benefits can be claimed under section 80CCD(1), 80CCD(2), and 80CCD(1B) of income tax at.
   80CCD(1) comes under Section 80C and it covers self-contribution. Salaried employees can claim a maximum deduction of 10% of their salary and self-employed individuals can claim up to 20% of their gross income.
   80CCD(2) is also a part of Section 80C which covers the employer’s contribution towards NPS. This benefit cannot be claimed by self-employed individuals. The maximum amount that an individual is eligible for deduction is either the employer’s NPS contribution or 10% of basic salary plus Dearness Allowance (DA).
   Under Section 80CCD(1B), individuals can claim an additional amount of Rs.50,000 for any other self-contributions as NPS tax benefit.
   So, individuals can claim up to Rs.2 lakh as tax benefits under NPS.
5. Premature withdrawal and exit rule of NPS: As it is a pension scheme, it is mandatory to invest till 60 years of age. Partial withdrawal is allowed after 3 years of opening an account. Investors can withdraw 25% of total contribution made. Premature withdrawal from NPS is allowed in circumstances like child’s wedding, sponsoring child’s education, buying a house or any medical emergency. Investors can withdraw 3 times in the interval of 5 years. And this rule is applicable to only tier I accounts.
6. After 60 withdrawal rules of NPS: Investor can not withdraw whole accumulated fund after retirement. It is mandatory to keep 40% of total corpus to have monthly pension. The remaining 60% is tax free.
7. Equity allocation rules of NPS: As per equity allocation rule, investor can invest upto 50% of investment in equity. There are two options available for investors:
   Active choice allows investors choose fund and split investment as per risk appetite
   Auto choice makes investment as risk profile and age of investor.
8. Voluntary: Investor can invest any amount in NPS account at anytime in financial year and investor can change amount.
9. Flexibility: Investor has the flexibility to select or change the POP (Point of Presence), investment pattern and fund manager. Investor can optimize returns as per various asset class (Equity, Corporate Bonds, Government Securities and Alternate Assets) and fund managers.
10. Portability: NPS account or PRAN will remain same irrespective of change in employment, city or state.

 Types of NPS account

	NPS Tier -I	NPS Tier – II
Status	Default	Voluntary
Withdrawal	Restricted withdrawal allowed	No limit for withdrawal
Minimum contribution required	Rs.500	Rs250
Tax Benefit	Up to Rs 2 lakh p.a.(Under 80C and 80CCD)	tax deduction under Section 80C only for government employee

NPS vs ELSS vs FD vs PPF

Scheme	Return	Lock in period	Risk involved	Tax of maturity amount
NPS	8% TO 10%	Till retirement	Market related risk	tax is levied on the monthly pension income
PPF	7% to 8%	15 years	Safe	Exempt from tax
ELSS	12% to 15%	3 years	Market related risk	Capital gain is taxable
FD	7% to 9%	5 years	Safe	Interest earned is taxable

Taxation and Tax Saving Options in India

Takeaway

Invest every year towards NPS and receive a monthly pension post-retirement. Once the money is deposited to the NPS account, the fund manager of the NPS invests the corpus into different asset classes like equities, debt, etc. You receive returns based on the performance of the fund.