What is the National Pension Scheme (NPS)?

National Pension Scheme is a pension scheme launched by the Government of India. NPS is regulated by Pension Fund Regulatory and Development Authority (PRFDA). National Pension Scheme was Initially Introduced to all the Central Government employees on 1^st January 2004. Since 2009 PFRDA has permitted to all the general public on a voluntary basis.

NPS offers tax benefits under section 80 C and 80  CCD. Corporates can offer NPS as an alternative to Provident Fund with a similar contribution from the Employer and Employee in Provident Fund. National Pension Scheme offers higher returns than Provident Fund.

National Pension Scheme is managed by 8 Fund Managers

1. Birla Sun Life Pension Fund
2. HDFC Pension Fund
3. ICICI Prudential Pension Fund
4. Kotak Pension Fund
5. LIC Pension Fund
6. Reliance Capital Pension Fund
7. SBI Pension Fund
8. UTI Retirement Solutions

Features of NPS

NPS offers two types of accounts known as Tier I and Tier II Account.

-Tier I Account: It is a Pension Account. It is Mandatory to open this account. Investment in this account can be withdrawn after attaining the age of 60 years. A minimum Annual Contribution of Rs 1,000 is required.

-Tier II Account: It is an Investment Account. Opening Tier II Account is optional. It can be either opened while opening the Tier I Account or later at any point in time. An investment made under this account can be withdrawn at any point of time as per individual’s needs. There is no minimum annual contribution required for this Account. A minimum balance of Rs 2,000 should be maintained in a Tier II Account.

Every NPS Subscriber is allotted with a unique 12-digit PRAN (Permanent Retirement Account Number).

 Any Indian Citizen in the Age of 22 to 60 Years can Invest in NPS. NRI (Non-Resident Indian) can also invest in NPS. In case of an NRI, if the Citizenship status is changed then the NPS account is closed automatically.

Who Should Invest in NPS?

NPS is an excellent investment option for any individual who wants some retirement benefits with good returns and can additionally save tax up to Rs 15,000 by investing Rs 50000 under Section 80 CCD(1B). Also, the fund management charge is the cheapest compared with any product available for investment.

Investing in NPS

 Investment under the National Pension Scheme, the subscriber can choose to invest in 3 different asset classes mentioned in the below table.

Asset Classes	Alternate Names
Equity Assets	Class E
Corporate Bonds	Class C
Government Securities	Class G

 

While investing in NPS, the subscriber has the option to choose the exposure in each asset class under two options mentioned below. The subscriber gets the option to change the Asset Allocation and Fund once in a year.

• Active Choice
• Auto Choice

In ‘active choice’ the subscriber gets the option to choose the asset allocation in each asset class restricting the Investments in Equity Assets to 75%.

In ‘auto choice’, the investment is done based on the age of the subscriber. The subscriber gets the option to choose between three types of funds. The fund allocation changes on the date of birth of the subscriber.

• Aggressive Life Cycle Fund
• Moderate Life Cycle Fund
• Conservative Life Cycle Fund

 

Aggressive Life Cycle Fund

Age	Asset Class E	Asset Class C	Asset Class G
Up to 35 years	75	10	15
36 years	71	11	18
37 years	67	12	21
38 years	63	13	24
39 years	59	14	27
40 years	55	15	30
41 years	51	16	33
42 years	47	17	36
43 years	43	18	39
44 years	39	19	42
45 years	35	20	45
46 years	32	20	48
47 years	29	20	51
48 years	26	20	54
49 years	23	20	57
50 years	20	20	60
51 years	19	18	63
52 years	18	16	66
53 years	17	14	69
54 years	16	12	72
55 years & above	15	10	75

Moderate Life Cycle Fund

Age	Asset Class E	Asset Class C	Asset Class G
Up to 35 years	50	30	20
36 years	48	29	23
37 years	46	28	26
38 years	44	27	29
39 years	42	26	32
40 years	40	25	35
41 years	38	24	38
42 years	36	23	41
43 years	34	22	44
44 years	32	21	47
45 years	30	20	50
46 years	28	19	53
47 years	26	18	56
48 years	24	17	59
49 years	22	16	62
50 years	20	15	65
51 years	18	14	68
52 years	16	13	71
53 years	14	12	74
54 years	12	11	77
55 years & above	10	10	80

 

Conservative Life Cycle Fund

Age	Asset Class E	Asset Class C	Asset Class G
Up to 35 years	25	45	30
36 years	24	43	33
37 years	23	41	36
38 years	22	39	39
39 years	21	37	42
40 years	20	35	45
41 years	19	33	48
42 years	18	31	51
43 years	17	29	54
44 years	16	27	57
45 years	15	25	60
46 years	14	23	63
47 years	13	21	66
48 years	12	19	69
49 years	11	17	72
50 years	10	15	75
51 years	9	13	78
52 years	8	11	81
53 years	7	9	84
54 years	6	7	87
55 years & above	5	5	90

Exit from NPS

A subscriber can exit from an NPS scheme only after finishing 10 years from account open date or after completing the age of 60 years.

Withdrawal from NPS can be allowed under two Categories.

• Normal Superannuation
• Death of the Subscriber

Normal Superannuation: After the subscriber reaches the age of 60 he/she can withdraw the NPS investment. In this 40% of the accumulated Investment value should be utilised to purchase an Annuity which provides monthly pensions. The remaining 60% of the Investment value can be withdrawn in a lump sum. Out of which 40% is tax-free and the remaining 20% is taxed as per the tax slab. In case the subscriber withdraws his NPS Investment before completing 60 years he can withdraw only 20% of the accumulated value as a lump sum and the remaining 80% has to be invested to purchase an annuity.

Death: In case of death of the subscriber the nominee or the legal heir can withdraw the entire amount.

Partial Withdrawal

A subscriber can withdraw up to 25 % of the corpus after completing 3 years from when the account was open. Withdrawal is allowed only for special purposes like Higher Education, Buying a Home, Treating a critical Illness, Childs Marriage and Starting own business.

Investment in Annuity

After the exit from the NPS Investment, an annuity can be purchased from annuity providers registered with PFRDA.

List of Annuity Providers registered with PFRDA

• HDFC Standard Life Insurance Company Limited
• ICICI Prudential Life Insurance Company Limited
• Star Union Dai-ichi Life Insurance Company Limited
• Life Insurance Corporation of India
• SBI Life Insurance Company Limited

There are different types of Annuity Insurance a subscriber can opt for as mentioned below.

Name of Annuity Scheme	Description
Annuity for life	Monthly pensions is paid during the lifetime of Annuitant. On death, the payment of annuity ceases
An annuity is guaranteed for 5, 10, 15 or 20 years and for life thereafter	Monthly pensions are paid during the lifetime of Annuitant. On death, the payment of annuity ceases
Annuity for life increasing at a simple rate of 3% per annum	Monthly pensions are paid during the lifetime of Annuitant which Increases by 3% every year. On death, the payment of annuity ceases
Annuity for life with return of purchase price on death	Monthly pensions are paid during the lifetime of Annuitant. On death, the purchase price is returned to the Nominee or legal heir
Annuity for life with the provision for 50% of the annuity to the spouse of the annuitant for life on death of the annuitant	Monthly pensions are paid during the lifetime of Annuitant. On the death of the Annuitant, 50% of the original monthly pension is paid during the lifespan of Spouse of the Annuitant. On the death of the Spouse, the payment of annuity ceases
Annuity for life with the provision for 100% of the annuity to the spouse of the annuitant for life on death of the annuitant	Monthly pensions are paid during the lifetime of Annuitant. On the death of the Annuitant, the monthly pension is paid during the lifespan of Spouse of the Annuitant. On the death of the Spouse, the payment of annuity ceases
Annuity for life with the provision for 100% of the annuity to the spouse of the annuitant for life on death of the annuitant, with the return of purchase price on death of the last survivor	Monthly pensions, are paid during the lifetime of Annuitant. On the death of the Annuitant, the monthly pension is paid during the lifespan of Spouse of the Annuitant. On the death of the Spouse, the purchase price is returned to the Nominee