Friday, 19 June 2020

A Guide to National Pension System (NPS)


National Pension System (NPS) is one of the retirement saving investment product that has started gaining popularity in the recent times. It is regulated by Pension Fund Regulatory and Development Authority (PFRDA) and central government. The scheme encourages the investor to choose a pension fund and invest regularly in this fund during his employment. After retirement a certain percentage of corpus can be withdrawn while the rest of amount is invested in Annuities and received in regular pensions.

A Guide to National Pension System (NPS)

Key Features of NPS

Eligibility & Opening of Account: Any Indian citizen between the age of 18 and 60 can invest in NPS. The account can be opened via online and offline process. One has to obtain a Permanent Retirement Account Number (PRAN) before the account becomes functional. In Online mode, with the help of Aadhaar, PAN and mobile number, PRAN can be generated which can used to login and invest in NPS. In offline mode, application forms can be downloaded from NPS website or can be physically collected from Presence Service Providers (POP-SP) falling under NPS. This form along with KYC documents has to be submitted at a POP and the PRAN is generated.

Types of Accounts: There are 2 types of accounts that one can opt for. Tier-I which is the mandatory pension account and the one which offers tax benefit and Tier-II account which is a voluntary account. A minimum of Rs 1,000 has to be invested in Tier-I in order to keep the account operative which is not a mandate for Tier-II. Additionally, there is no upper limit to invest in these two accounts

Lock-in Period & Withdrawal: Investments in Tier-I account are locked till 60 years of age. Partial withdrawals are applicable for specific purpose only for a maximum of 3 times during the entire tenure of the account. After attaining the age of 60, the investor can withdraw 60% of the overall corpus while 40% corpus is received via regular pensions. There is no lock-in period for Tier-II account holders and any withdrawal is taxable as per current tax slabs.

Fund Managers: The money invested in NPS is managed by PFRDA registered fund managers. At present, there are 8 pension fund managers to choose from while opening your account. One can choose same or different fund managers for Tier-I and Tier-II accounts. Also, if you not satisfied with the performance of your fund manager, you can change them anytime.

Portfolio Allocation: NPS offers 2 kinds of investment choices - Auto and Active. In Auto mode, the % of funds allocation to equity, debt and other securities is pre-decided by the fund manager, while in Active mode, the investor has the authority to decide this allocation.

Taxation: First, lets focus on the tax advantage. If you have exhausted your Rs 1.5 lakhs under section 80C, NPS allows an additional tax benefit on Rs 50,000 (over and above ceiling of Rs 1.5 lakhs) under section 80CCD. In addition, the 60% corpus that can be withdrawn after completion of term if non-taxable. Now focusing on the tax disadvantage part. The regular pension that the investor will receive post 60 years will be fully taxable.

Is NPS Right Product for You

Plus Points: If you are planning to save for retirement and have a low risk appetite, NPS is a good low-cost product to consider. If you are unsure about asset allocation, the fund manager can do your job by handling the portfolio. It also provides an additional tax benefit beyond your 80C limit on Rs 50,000 ie.. if you fall in the highest tax bracket, you can save around Rs 15,000/year. 

Negatives: It is a long term product and one has to stay invested upto 60 years which may not suit the new millenial generation goals. Also, 40% of corpus is mandatory to be invested in annuity in order to receive regular pensions.

Invest in NPS after carefully examining your objectives, number of ears left for you to retire and your life expectancy.