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Retirement planning is a very important part of goal planning. The National Pension Scheme (NPS) also called as New Pension Scheme (NPS) is a pension scheme by the Government, based on a defined contribution by the investor. You can open an account to accumulate a pension corpus by contributing monthly. Your contributions grow based on the investment avenue you choose.
Features of NPS
1. Any citizen above 18 years can invest in NPS with a minimum investment size of Rs 6000 per year. There is no maximum investment cap.
2. You can open an NPS account by visiting any registered point of purchase (POP) and submitting KYC documents. There are 22 registered POPs across the country, including some banks and financial institutions.
3. Investors can choose from six different fund managers for investment across three styles - low risk, medium risk and high risk. If you choose the high risk investment option, upto 50% of the corpus is invested in equity linked instruments or index funds which mirror the Sensex. You can switch funds without any cost or tax implication.
4. Annual charges in NPS are very low at 0.00009% for fund management.
Structure of the scheme
NPS is available in two forms:
Tier-1 account- This account does not allow premature withdrawal of your retirement savings. Money will be available on maturity only, ie: when you turn 60 years. Typically, if an employer is offering NPS, he will make a contribution in Tier-1 account, equal to your contribution.
Tier-2 account- This account is a voluntary savings facility where you can withdraw your savings whenever you wish. The Government and employers make no contribution to this account. However, to open this account you will need an active Tier I account.
Withdrawal of funds from NPS
Premature withdrawal before you are 60 years: You are required to invest a minimum of 80% of accumulated wealth to purchase a life annuity from a registered life insurer. You are allowed to withdraw the remaining 20% as a lumpsum.
Withdrawal on attaining 60 years: You will have to invest a minimum of 40% of your accumulated amount to purchase a life annuity from a registered life insurer. The remaining amount can be withdrawn as a lumpsum or in a phased manner till you reach the age of 70.
Death of the investor: In case of death of the investor, the nominee will receive 100% of the accumulated wealth in the account.
Taxation
At present, contributions made to Tier 1 account follow "Exempted-Exempted-Taxed". The contribution amount, the appreciation accrued on the contribution and the amount used by the subscriber to buy the annuity are not taxable. However, the amount withdrawn by the investor is taxable. Going forward, as per the Direct Tax Code (DTC), the tax treatment is proposed to follow "Exempted-Exempted-Exempted", similar to PPF - in addition to the existing benefit, the amount withdrawn by the investor after the age of 60 will be exempted from tax. Since the way forward on DTC itself is not very clear at the moment, this may not get sorted out easily, sometime soon.
Benefits of the scheme
1. Better Returns compared to PF: The biggest advantage of NPS compared to other retirement options is the high rate of return which the investor can receive. As NPS provides the option to the investors to decide the manner in which their money is to be invested (ie: in equity market instruments/fixed income instruments/government securities), returns are higher than traditional retirement options like PF. You also have the option of shifting from one fund manager to another, without incurring additional costs helping you invest in the best fund. Since the scheme gives market determined rates, in the long run, this is likely to be a far more viable option.
2. Safe bet compared to mutual funds: Though investment options like mutual funds give a higher return than NPS, the latter is a safe retirement planning option as there is a cap on the amount which can be invested in equity, ie:50% of funds. Further, the scheme has Government backing and is regulated, which makes it a safe avenue.
3. NPS is, by far, the cheapest pension product with very low annual charges.
4. Contributing to NPS gives you a tax benefit under Sec 80C. You can also claim additional deduction under Sec 80CCD(2) if your employer contributes upto 10% of your basic salary in the scheme.
Pitfalls of the scheme
The most important drawback of the NPS is the inflexibility in withdrawal of funds from Tier-1 account. Though withdrawal is permitted from Tier 2 account, the investor needs to open a Tier-1 account first. This has acted as a deterrent to non-government employees. Further, unlike PF, an investor cannot avail a loan against his NPS holdings.
Though the NPS is an attractive investment option by the Government, it is still not very well-known among the investor community. This is an ideal scheme for conservative and balanced investors who can enjoy better returns compared to other investment options at a low cost and with Government backing.
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