What is NPS? Should you invest in NPS to get additional tax benefit?

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National Pension Scheme (NPS) is available to all citizens from May 2009.

Who can invest in NPS?

  • Every citizen of India including NRI is eligible to join NPS.
  • Individual age should be between 18-55 years as on the date of submission of an application.
  • They should comply with KYC Norms.
  • Earlier NPS was available to the only Government employees.
  • All Government Employees need to mandatorily invest 14% ( earlier 10%) of their salary in NPS.

What is the Main aim of Govt. to promote NPS?

  • Provide old age income/Pension
  • To have Market based returns over the long term
  • To have old age security coverage to all citizens.

What are the schemes/plans available in NPS?

NPS has 3 types of accounts. Tier I Account, Tier II Account & Swavalamban accounts

  • Tier I Account: This is a mandatory account for all NPS opting investors. since it is a pension account, investments made in this account has to be held till retirement. You cannot withdraw the amount before retirement. The tier-I account is mandatory to open a Tier-II account.
  • Tier II Account: This is a flexible account, You can invest any time and withdraw any time without having any lock-in period.
  • Swavalamban account: This type is for encouraging poor workers, Govt of India would pay Rs 1000 per year for the First 4 years contribution towards this NPS fund, however, there are so many conditions to get such benefit.

Major advantages of NPS.

  • Simpler process: Applicable to all citizens, the opening account is simple.
  • Flexibility: you can choose your investment pension funds based on your risk profile. You can open this account sitting in any country, any job, any city. You need not worry if you shift your job or location during the tenure.
  • It brings an attractive long term saving avenue to effectively plan your retirement through safe and regulated market-based returns.
  • Low cost: Investment is managed by mutual fund companies at a very attractive rate compared to direct mutual fund plans.
  • Better Regulation: The Scheme is regulated by Pension Fund Regulatory and Development Authority (PFRDA) & National Pension System Trust (NPST).
  • NPS Equity funds have given returns of around 12% to 14% in the last 5 year period.
  • Tax benefits: Investment in NPS is eligible for tax benefits up to Rs. 1.5Lacs under section 80 C.  and an additional Rs. 50,000 is eligible under section 80CCD (1b) for the contribution made towards NPS.
    • If you have other avenues for 80C deduction like PPF, ELSS, Home loan etc. You can simply invest only Rs. 50,000/- to get additional benefit under 80CCD (1b)

What are the Disadvantages /Drawbacks of NPS?

  • Complicated withdrawal rules- Detailed rules mentioned below.
  • Compulsory annuity insurance plans- Detailed rules mentioned below.
    • These 2 are the major drawbacks  of NPS
    • However, the Government is constantly reviewing these rules
    • Govt has relaxed many rules from the date of launch till now.

You may read How to earn High Returns from your cash/ Bank Balance- Liquid Mutual fund is the Answer!

What are the Investment options available in NPS?

There are three Asset classes in NPS:

Class E-Equity, C- Corporate Bonds, and G- Govt Securities

  • Asset Class-EInvestment will be in equity markets. Investment in this option will be high risk with high return possibility.
  • Asset Class-CInvestment will be in fixed income investments like corporate bonds other than Government Securities. This option will be a medium risk with medium returns option.
  • Asset Class-GInvestment in Government Securities.  This investment is low risk with low returns option.

You can choose them in based on your choice & risk profile or auto allocation by NPS based on your Age.

Active Choice
  • Select your own % allocation in each of the asset classes
  • You can select to invest completely in Asset Class C and Asset Class G and maximum up to 50% in Asset Class E
  •  Choosing an Asset class is important as the returns will depend on this.
Auto Choice- Life Cycle/Age-based allocation

Life cycle/age-based allocation is suitable for people who have less knowledge of investment and not able to decide on investment options.

  • the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio.
  • At the lowest age of entry (18 years), the auto choice will be at an investment of 50% of pension wealth in E Class, 30% in C Class and 20% in G Class.
  • These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36.
  • From age 36 onwards, the weight in E and C asset class will decrease annually
  • The weight in G class will increase annually till it reaches 10% in E, 10% in C and 80% in G class at age 55.

NPS Auto allocation Matrix based on Age

AgeAsset Class EAsset Class CAsset Class G
1850%30%20%
3550%30%20%
5020%15%65%
5510%10%80%

What is the minimum investment in each category?

You need to make an initial contribution (minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration.
Subsequent contributions shall be as below following conditions:

Tier I:

  1. Minimum amount per contribution – Rs. 500
  2. Minimum contribution per Financial Year – Rs. 1,000
  3. Minimum number of contributions in a Financial Year – one

Tier II:

  1. Minimum amount per contribution – Rs. 250
  2. No minimum balance required, you can withdraw any time as you wish.

You may read Why you should never go for Traditional Endowment Life Insurance plans? Term insurance is the Best option!

What are the withdrawal Rules for Tier- I account:

  • Withdrawals at the time of retirement of 60 years
    • One can withdraw 60% of the accumulated wealth after attaining 60years of age.
      • This withdrawal amount of 60% is tax-free as per recent announcement by Govt in 2018, earlier only 40% was tax-free.
    • Balance 40% should be invested in buying an annuity insurance plan.
      • This annuity plan will provide pension amount for your lifetime as per your chosen annuity insurance plan.
      • The annuity amount received is taxable in the year of receipt as per your income tax slab rate of that year.
    • In case if the amount of wealth is less than Rs. 2 Lacs as on the Date of Retirement, the investor Withdraw complete amount without any tax.
  • Withdrawal before retirement age of 60 years
    • 25% of the invested amount can be withdrawn before 60 years of age
      • This withdrawal amount is tax-free
      • You need to be a member of NPS for at least 3 years
      • Reason shall be for children higher education, marriage, housing, Medical, business etc.
        • If such a declaration not available, only 20% can be withdrawn as tax-free.
      •  Example if you have invested Rs 10 lacs in the NPS till now. Assuming this grows into Rs 20 Lacs over time. If you wish to withdraw some amount, you will be allowed to withdraw up to 25% of your contribution which is Rs 10 lacs and not Rs20 lacs which works out to be 25 % of 10 Lacs is Rs  2.5Lacs.
    • Balance 80% has to be invested in an annuity insurance plan.
      • This amount is expected to give you a pension amount for your lifetime as per your chosen annuity insurance plan.
      • The annuity amount received is taxable in the year of receipt as per your income tax slab rate of that year.
  • Withdrawal upon death

    • The complete accumulated amount will be paid to the nominee.
    • Such withdrawn amount will be tax-free
    • In the case of govt employees, the entire amount cannot be withdrawn, Purchase of annuity plan is mandatory by the nominee.

Conclusion: considering very low cost, ready-made asset allocations, option to choose both Equity and Fixed income together, Flexible, Great tax saving instrument,  No doubt NPS is a great vehicle for Pension / Retirement corpus. The NPS has many favorable features that make it the best retirement plan although it has a major drawback on withdrawal part. Going forward Govt is constantly addressing most of the drawbacks from the plan, its unattractive features like compulsory annuity plans may be reviewed in the future.

I suggest going for NPS is best for retirement investment moreover you avail tax benefit of an additional Rs. 50,000/- u/s 80CCD (1b). Investors closure to retirement must not enter now as it has limitations on withdrawals mentioned above.

Choose wisely, Choose investment over just saving in PPF /FDs.

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You may also read How to pay Zero tax on Income up to 10 Lacs in FY 2018-19 and Zero tax up to 12 Lacs in next FY 2019-20 onwards?


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  1. is it possible to claim 80C for 1.5Lakh and extra 50000 also with NPS alone?

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