National Pension Scheme (NPS)

Investments for Wealth Generation

What is National Pension Scheme?

Pension is a fund filled by an individual for a long time. During retirement it can be tapped in to for a regular steady income. The National Pension Scheme is an initiative taken by the Government of India to allow every citizen to gain from a pension account.

It is accumulated over time with a 10% contribution from the individual’s basic salary. It is made mandatory for all government employees, however, the private sector employees can choose between the Employee Provident Fund (EPF) or NPS

Conservative Indians looking to secure a retirement corpus with tax advantages.

Those who are willing to take on more risks for earning better returns

  • Equity mutual funds
  • Direct stock trading

Highlights

  1. Risk Appetite –  There is moderate risk involved.
  2. Returns – Interest is not guaranteed
  3. Taxability – In Tier II accounts have no tax benefits, while Tier I accounts can claim exemptions under Section 80(C) and 80[CCD(1B)]
  4. Lock-in period – longest lock-in as it can be withdrawn on after the age of 60 years
  5. Withdrawals –  after 3 years withdrawals are allowed for predefined purposes
  6. Investment Safety –  Portions are invested in equities which pose a certain amount risk
  7. Inflation Cover – The returns are linked to the market (equities) so there is a substantial protection against inflation

Investment Goal

The most important reason to open an account is the automatic access that it offers to other financial instruments such as investments, loans and savings. Additionally, the account can be used to make financial transactions as well as to park a portion of savings to meet short-term needs and contingencies.

Overview

Key Features
Description
QualificationAny citizen of India is eligible
Age Group-Minimum is 18 years of age.
-Generally the maximum is 65 years .

ClosureTier I: 20% can be withdrawn with tax and the remaining must be used to buy an annuity
Tier II: No limits to withdraw
Account Holding TypesTier I
Tier II
NomineesThis provision is available.

Capital & Inflation Protection

The amount is not completely protected as portions are invested in equities which pose a certain amount risk

The returns are liked to the market through equities which beats the inflation over a long term

Guarantees

There is no guarantee under NPS of how much an individual will receive.

Liquidity

After a lock-in of 3 year, 25% of the contributions can be withdrawn for certain purposes such as marriage, education, treatment of illness, etc. These withdrawals can be added back within the tenure

Tax Implications

  • The NPS has the EET (Exempt on contributions-Exempt on accumulation-Tax on maturity) status.
  • A deduction of up to Rs. 1.5 lakh is allowed under Section 80(CCD) and Rs. 50000 under Section[CCD(1B)].
  • At the end of the tenure, 40% of the amount received tax-free

New Account Setup Information

  • How to open?

An NPS account can be opened in any one of the banks empanelled under NSDL. If you haven’t completed KYC, the following documents must be submitted:

               -Aadhaar card

               -Self declaration statement claiming no other account under NPS

               -Passport size photographs

              -How to manage?

  • The scheme invests into equity, debt and government securities. The investor can choose to opt on their own through Active-choice option or have the allocation done by default depending on his age through Auto-choice option.

Online Access

The NPS account can be opened online at enps.nsdl.com by selecting the investment option and the amount to be invested. If the person already has an account with the institution where NPS has a POP (point of presence) then registration can be done without additional documentation.

Key Takeaways

  • Since NPS is a pension scheme it has a long lock-in period
  • The contributions which are accumulated in time are exempted from tax and the maturity value is taxable (EET status)
  • Based on the investor’s choice, the NPS is market linked through equity which earns a high level of returns

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