The National Pension Scheme (NPS) was initiated by the Govt. of India as a voluntary retirement savings option to enable the citizens an easy and convenient way to provide themselves for the sunset years. This is a contributory pension scheme for the subscribers under the Pension Fund Regulatory and Development Authority (PFRDA) which operates under the jurisdiction of ministry of Finance. NPS is like the EPF (Employee Provident Fund) and PPF (Public Provident Fund) in the tax treatment i.e., EEE (Exempt-Exempt-Exempt) model.
The NPS is available for all Resident and Non-Resident Indians between the ages of 18 and 70. The recent changes in the rules allow for senior citizens up to above 65 (up to 70) to participate in this scheme which earlier was restricted to age 60 only. This facility extends to all citizens including OCI (Overseas Citizens of India) to defer the NPS account till age 75. The existing subscribers are permitted to operate the NPS account to the increased age eligibility norms.
The NPS comes with two different accounts viz., Tier I and Tier II. Tier I is a mandatory retirement savings fund which is locked till age 60. All contributions are subject to restricted withdrawals and could also claim tax benefits (according to the prevailing sections) for the contributions done towards it. This account could be opened from any of the POP (Point Of Presence) who’re appointed by PFRDA, who provide their services through their network of branches called POP Service Provider (POP-SP). Any citizen including the NRIs could open this account online. A minimum initial contribution and subsequent minimum contribution of Rs. 500/- is allowed for this account while a minimum contribution of Rs. 1000/- per financial year is mandatory.
Tier II is a voluntary savings facility provided by NPS, where the applicant/subscriber could withdraw at will from the account. This is not a retirement savings account and hence can’t be claimed for any tax benefits. This account could also be opened by all citizens including NRIs but they’ve to be present in India at the time of the account opening. A minimum contribution of Rs. 1000/- at the time of opening and a minimum subsequent contribution amount of Rs. 250/-, with no restrictions of minimum contributions in a financial year. However, a tier I is mandatory for anyone to operate the tier II account.
Any individual between the ages 18 and 65 should obtain a PRAN (Permanent Retirement Account Number) form any of the POP after providing the required documents. Only once the PRAN is available, could one open a NPS account.
A subscriber to NPS could opt for a choice of funds, on how the wealth could be generated upon the contributions. There are four different asset classes with acronyms as A, C, G and E. Asset class G is predominantly into government securities, class C comprises of fixed income instruments other than govt. securities like corporate bonds, etc., class E consists of predominantly equity market instruments for now the larger/broader indices and class A is related to instruments that are invested in Alternate Investment Schemes like REIT (Real Estate Investment Trusts), InvIT (Investment Trusts), MBS and CMBS (Commercial Mortgage-backed Securities) and AIFs (Alternate Investment Funds).
There are two available modes of investment upon these asset classes on how the fund is distributed as. Subscribers could invest a maximum of 75% of their wealth or contributions into equity i.e., asset classes E till age 50 while a maximum of 5% into A. This is available in the Active Choice while the Auto Choice where a pre-determined proportion of the fund is invested across the various asset classes according to the age of the subscribers. This is also called as Life-cycle fund as the portfolio of the NPS fund decreases its equity (asset class E) while simultaneously increasing the debt (asset class G) as the age of the subscriber increases.
The default choice is life cycle or auto choice with three life cycle funds available. LC75 or Aggressive Life Cycle Fund, allows a 75% of exposure to E till age 35 and gradually reduces as per the age of the subscriber. In LC50 or Moderate Life Cycle Fund, the exposure to equity investments (E) starts with 50% till age 35 and reduces subsequently as age progresses. In LC25 or Conservative Life Cycle Fund, the E portion halts at 25% till age and reduces going forward. The default auto choice is always moderate life cycle fund, LC50 in case the subscribers doesn’t specify any.
As the very purpose of NPS is for retirement savings, the maturity or access to fund happens only at the age of 60. At least 40% of the accumulated wealth must be utilized for the purchase of an annuity, so about 60% of the corpus could be withdrawn at the age of 60. In case of the accumulated corpus is less than 5Lakh, the subscriber is allowed to withdraw as a lumpsum at maturity. NPS allows for a premature withdrawal i.e., before age 60 but only to a maximum of 20% of the fund and the rest (80%) must be consumed through an annuity.
In the unfortunate event of death of the subscriber, option is available with the nominee to receive 100% of the accumulation in lumpsum. However, if the nominee wishes to continue with the NPS, they could subscribe to NPS. The tax benefits are up to 50,000 of contribution for each financial year under section 80CCD (1) for all individuals. Also, another provision where the employer could contribute on behalf of the employee under section 80CCE up to 10% of the salary (Basic+DA). This is beyond the earlier 50K per financial year. Moreover, another biggest attraction for investment in NPS other than the taxation is cost of investment being the lowest or cheapest across all forms of investments like MF, ULIP, etc. and even an ETF.
This article was originally published in "The Hans India" daily on 25th Apr '22.