How to plan your retirement with National Pension System (NPS)?

The best way to predict your future is to invest in it.

At a point when individuals retire they will either have no or very little monthly income. This means that, you have to alter your lifestyle. Coming to think of it, it’s actually difficult to compromise on your comforts and expenditure.

As a solution, opting a pension scheme would help you to save a good corpus for your old age, thus providing financial security and freedom. One such scheme that we will discuss today is the National Pension System (NPS).

National Pension Scheme

The National Pension System is a Government initiative, with an intention to provide pension opportunity to every Indian (Resident or Non-Resident) and to inculcate the habit of saving specially for retirement. It was rolled out on January 2004 for new Government recruits and has been made mandatory for all central government employees and some state government employees. This scheme is not compulsory for Government Employees who have joined before January 2004, however they can always opt for it if they want to. As for the private sector employees, they are given a choice to choose between Employees’ Provident Fund Organization and NPS.

Eligibility for NPS

Any person between the age of 18 – 65 years can open an NPS account.

Types of NPS

There are two types of schemes under NPS: Tier 1 and Tier 2. Let’s dive deeper into both of them:

Tier 1

It is a mandatory account for all those who opt for NPS. It has different implications depending on the category you belong to:

  • The Government employees have to contribute 10% of their salary (salary = basic + DA) and the government will make equal contributions as well.
  • For others opting this scheme, the initial contributions is Rs. 500/- at the time of account opening and minimum annual contribution is Rs. 1000.

Tier 2

This is not a compulsory account like Tier 1. This account allows high liquidity as funds can be withdrawn any time. There are no contributions from the government or the employers in Tier 2 and include no tax exemptions either. There are three important points to make note of:

  • The minimum amount required to open this account is Rs. 1000/-
  • Minimum monthly contributions amount to Rs. 200/-
  • It is also necessary to hold a minimum balance of Rs. 200/- every financial year.

Exit Option

If you retire at 60:

  • 40% withdrawals are free from tax.
  • From the balance 60%, 40% minimum has to be used to purchase annuity and the remaining 20% can be used to either buy annuity or can be withdrawn by paying tax according to the tax slab you fall into.

If you retire before 60 years:

  • You would use 80% of your corpus to buy annuity.
  • And withdraw the remaining 20% by paying the amount taxable according to the tax slab you fall into.

Remember that the amount via annuity is taxed according to your tax slab. In the event of the account holder’s death, the entire amount is given to the nominee.

Tax Benefits

  • Investments in NPS receive tax deductions up to Rs. 1.5 lakh per annum under Section 80CCD of the Income Tax Act.
  • Also, NPS is one such instrument that provides additional tax deduction up to Rs. 50,000 under Section 80CCD(1B) in a financial year.
  • At term completion, 40% of the amount received is free from tax.

Investment options

One can invest in NPS through Fund Managers. Here is the list of Pension Fund Managers:

  • HDFC Pension Management Company.
  • ICICI Prudential Life Insurance Company.
  • Kotak Mahindra Asset Management Company.
  • LIC Pension Fund.
  • Reliance Capital Asset Management Company.
  • SBI Pension Funds.
  • UTI Retirement Solutions.
  • Birla Sun Life Pension Management.

These fund managers invest funds in varying proportions of equity, corporate debt and government securities out of which:

  • Equity come with maximum risk but has higher chances to earn maximum returns.
  • Government securities come with minimum risk and least returns.

The two investment options available are:

  1. Active choice: With this investment option, an investor gets to mix equity, corporate debt and government securities as per his/ her choice. However, allocation to equity can be a maximum of 50%.
  2. Auto choice: Allocation is done as per the investor’s age. Let me explain this with the help of a table:
EquityTill the age of 35, equity portion is 50%, post which it reduces 2% yearly till it becomes 10% by the age of 55.
Corporate DebtTill the age of 35, the corporate debt is 30% , post which it reduces 1% every year till it becomes 10% by the age of 55.
Other Options

  • Aggressive life-cycle fund - begin with equity allocation of 75%

  • Conservative life-cycle fund - begin with equity allocation of 25%

They reduce as per the investor’s age advances.

Opening the NPS Account:

You can open an NPS account with:

  • PSU Banks
  • Private sector banks such as ICICI Bank, IDBI Bank, SBI and many more
  • UTI AMC and Post Offices.

All you need is:

  • Fill up the prescribed form by visiting a point of presence.
  • Submit required documents along with the KYC (Know Your Customer) documents.
  • Once your request has been processed, the Central Record Keeping Agency (CRA) will send you a unique Permanent Retirement Account Number (PRAN).

Hopes these details help you in your journey with NPS. After all, we all want to say:

“Finally retired : Goodbye Tension, Hello Pension. “

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