How to Begin Investing in National Pension Scheme?

What Is National Pension Scheme & How to Invest In It?

If you are looking for a BETTER return along with an instrument to build a corpus of considerable size for retirement, with complete tax exemption (Exempt, Exempt, Exempt) on maturity, National Pension Scheme is your true mate.

“National Pension Scheme is the one of the cheapest retirement plan where you pay as low as 0.02% of your investment value as annual fees ”

What is National Pension Scheme?

National Pension Scheme is a pension scheme with a component of investment, launched by the Government of India, designed especially for old-age people to ensure financial security for them, after retirement.

NPS is regulate by PFRDA(Pension Fund Regulatory & Development Authority ) that ensures that the returns are attractive & safeguarded

The amount invested stays locked in till retirement age and on maturity, you can withdraw 60% of the corpus and the remaining 40% gets invested in an annuity plan to ensure regular income for a stress-free retirement.

Understanding National Pension Scheme in Detail:

Account Type:

In NPS you have an option to select from two Account type

Tier I: This is a pure retirement account and is loaded with attractive tax benefits, but all the benefits can only be availed after the age of 60 years. This account is mandatory

Tier II:

This account type has no withdrawal restrictions like the Tier I account, and you can take out money anytime you want. A Tier-II account is optional but if you want to opt for this you need to have a Tier I account first.

Investment Contribution Capping:

Initial Contribution :

At the time of registration, NPS investors are required to

• Invest min Rs 500 in Tier I account
• Min Rs 1000 in Tier II account

Subsequent Contribution:

After initial investment at the time of registration, the subsequent contributions, as well as frequency, may vary, but there will be a minimum contribution of Rs 1,000 annually under Tier I and Rs 250 under Tier II.

Withdrawal Exceptions:

In Tier I one can avail premature partial withdrawal only in the case of

• Critical illness
• Child’s Education
• Wedding expenses
• For house buying or construction

NPS has been designed to ensure it meets the financial needs of the user after retirement, so the user needs to keep this at the core while making an investment decision, or else NPS as an instrument will fail to meet its objective.

NPS is Market Linked

NPS is a market-linked product, that has a track record of consistent returns to 10 % annually which is a notch up when it comes to another popular retirement instrument like PPF. Investments in NPS are distributed into the following asset class ECGA, category

• E: Equity
• C: Corporate bond
• G: Government Securities
• A: Alternative Investment Fund

Fund Managers:

NPS subscribers have the freedom to select from 7 fund managers appointed & governed by PFRDA, based on the selected fund manager user can invest in the available asset classes which we discussed above.

How to choose an investment allocation Strategy?

The user has the option to choose from two fund allocation strategies

• Active
• Auto

Active Choice:

In this type, NPS subscribers have control over how they want to allocate their money to different asset classes.

Automatic Choice:

In automatic choice, the asset allocation is automatically done based on subscriber age.

The user has the option to swap between active and auto, with a caveat that this choice has to be exercised in advance and only once in a given financial year.

How Does Withdrawal Works On Maturity?

At the time of maturity which happens at the retirement age of 60 years, the user can withdraw 60 % of the entire corpus which is completely tax exempted, and the remaining 40% is mandated to be invested in the purchase of an annuity plan.

If the total accumulated pension corpus is less than or equal to Rs. 5 lakh, the Subscriber can opt for 100% lumpsum withdrawal.

An annuity plan is to ensure that the fixed sum of amount is being regularly received by the user for their remaining life as a pension. There are many insurance companies that provide this annuity plan, this plan has multiple variations to suit the user needs

Annuity Types:

The amount received as the annuity is not tax exempted, it is added to the NPS subscriber’s income source and is taxed as per the tax slab s/he falls into

Key Benefits Of National Pension Scheme:

NPS is based on Permanent Retirement Account Number (PRAN) which is allotted to every subscriber who purchases the NPS. With the core objective to ensure a secure source of income at the time of retirement for the citizen of India NPA was launched, it offers an array of benefits which is listed below

• Regulated & Safe:

NPS is regulated by PFRDA (Pension fund regulator under Ministry of Finance, Govt. of India.) which ensures transparent norms governing the investment activities. NPS Trust ensures that every participating entity like fund managers are adhering to the guidelines set forth by PFRDA and are being regularly monitored.

• NPS Is Voluntary Scheme:

It is a voluntary scheme for all citizens of India. One has the freedom to choose how much to invest and the frequency to do so.

• Flexibility:

User has the flexibility to select or change the POP (Point of Presence), investment strategy, and fund manager to suit their investing needs, this gives users the control to diversify in various asset classes like Equity, Corporate Bonds, Government Securities, and Alternate Assets and generate better long term returns

Value For Money & Economical:

In NPS, You pay less than 0.02% of your investment value as annual fees

NPS is one of the most economical financial instruments to plan your retirement, with a lower cost of investment

On the cost front:

NPS operational charges are governed by the NPS trust, and currently, there is an initial subscriber registration charge of Rs 200. Then, you have the account opening cost of Rs 40 with an annual account maintenance cost in the range of Rs 60 — Rs 95, and each transaction costs about Rs 3.75.

Portability:

While purchasing NPS, the user gets PRAN, which is a unique number that is portable. It remains the same irrespective of change in the user’s employment or location.

Fosters discipline while investing :

In NPA your invested amount is locked until your retirement age(60 yrs). You need to invest min Rs 1000, which has to be done every year. You have to be a disciplined and patient investor as your amount can be withdrawn only after you attain the retirement age

Tax Benefits:

• The NPS offers taxes, and benefits both for making regular contributions and also at the time of maturity. NPS is a EEE(Exempt, Exempt, Exempt) tax-saving financial tool.
• Individual taxpayers can claim deduction on contributions under Tier I NPS up to Rs 1.5 lakh in a financial year under Section 80C.
• NPS subscribers can claim an additional deduction for investment up to Rs 50,000 in Tier I account in a financial year under Section 80CCD (1B) over and above the Rs 1.5 lakh deduction under Section 80C.
• In Tier-II account type users do not get any tax benefits.

Frequently Asked Questions

1) Why should I open an NPS Account?

Opening an NPS account has its own advantages as compared to other pension products available. Below are a few features which make NPS different from others:

1. Low-cost product
2. Tax breaks for Individuals, Employees, and Employers
3. Attractive market-linked returns
4. Easily portable
5. Professionally managed by experienced Pension Funds
6. Regulated by PFRDA, a regulator set up through an act of Parliament

2) How do NPS works?

Upon successful enrolment, a Permanent Retirement Account Number (PRAN) is allotted to the subscriber under NPS. Once the PRAN is generated, an email alert, as well as an SMS alert, is sent to the registered email ID and mobile number of the subscriber by NSDL-CRA (Central Record Keeping Agency).

Subscriber contributes periodically and regularly towards NPS during the working life to create the corpus for retirement. On retirement or exit from the scheme, the Corpus is made available to the Subscriber with the mandate that some portion of the Corpus must be invested into Annuity to provide a monthly pension post-retirement or exit from the scheme.

3) Who will invest my money in NPS?

Pension Funds are responsible for investing contributions, accumulating them, and managing pension corpus through various schemes under National Pension System in accordance with the provisions of the PFRDA Act.

4) What are the benefits of a Tier II account?

Below are a few significant benefits of Tier II NPS Account:

1. No additional annual maintenance Charge
2. Saving for your day-to-day need (withdrawal at any point in time)
3. Transfer fund to pension account ( Tier I) any time
4. No minimum balance required
5. No levy of exit load
6. A separate Nomination facility is available
7. Option to select different Investment patterns from Tier I

5) How are the returns calculated in Tier I and Tier II accounts?

Is there an assured return/div/bonus?

The contribution remitted in Subscriber’s account is passed on to the PFMs(Pension Fund Managers) as selected by the Subscriber at the time of registration (or changed subsequently). The PFMs invest the money and declare Net Asset Value (NAV) at the end of each business day. Accordingly, based on the NAV, units are credited to the Subscriber’s account. The present value of the investment is arrived at by multiplying the units held with the NAV.

The return under NPS is market-driven. Hence, there is no guaranteed/defined amount of return. The returns generated through investments are accumulated for the pension corpus and is not distributed by way of dividend or bonus.

6) Do I need to re-open the NPS account when I change my Job or location?

No, there is no need to re-open the NPS account when you change your job or location. Portability is one of the key features of NPS, it can be operated from anywhere in the country irrespective of individual employment and location/geography.

This implies that you can shift your PRAN from one sector to another, e.g. Central Government to the Corporate sector, State Government to Central Government, etc., and vice versa. Further, if you are relocated because of any reason, you can also change POP-SP within the same POP or you can change to the POP of your choice available to the location.

7) Where can a Subscriber register a grievance/complaint?

NSDL-CRA has built a multi-layered Grievance redressal mechanism that is easily accessible, simple, quick, responsive, and effective.

You have the option of registering a grievance/complaint through the following alternatives:

Web-based interface:

A Subscriber can register the grievance against any entity under NPS through log-in to the account. Alternatively, they can visit at “Log Your Grievance / Enquiry” section under “Subscriber’s Corner” of this website to log the grievance/query. Through this platform, Subscribers can register grievances/queries even without having the PRAN Details. On successful registration, a token number will be displayed on the screen for future reference.

Call Centre/Interactive Voice Response System (IVR):

Subscribers can contact the NSDL-CRA call center at a toll-free telephone number and register the grievance. Subscriber has to authenticate themselves through the use of the T-pin allotted to raise the grievance. On successful registration of grievance, a token number will be allotted by the Customer Care representative for any future reference.

Physical forms:

Subscribers can also submit the grievance in a prescribed format to the POP-SP. Subscriber has to mention the PRAN as the means of authentication on the form. Upon submission of the form to the POP-SP, the Subscriber will get an acknowledgment receipt.

The token number would be emailed to you by NSDL-CRA (if the email id is mentioned), otherwise the same will be emailed to the concerned POP-SP. Subscriber can get the token number from the POP-SP against the acknowledgment receipt.

For Further FAQ one can visit: https://npscra.nsdl.co.in/all-citizens-faq.php

Summary:

When it comes to retirement, planning the living expenses can be quite daunting, especially when there is no regular income source, also inflation is also on the rise which needs to be factored in your future planning. Planning for health emergencies at old age requires a sizable corpus, So NPS can be your true friend to build a retirement corpus that will meet your financial obligations post-retirement.

If you are looking to plan your retirement and leverage NPS to get the maximum returns and tax benefits. You can invest without any hassle through our FinMapp here

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