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National Pension Scheme benefits- Should you invest?

Should you invest in National Pension Scheme? What are the National pension scheme benefits? Whether it’s worth it? Is it helps in tax savings? If you too have all these questions, then read the below article.

What is NPS?

National Pension Scheme (NPS), as called, is a pension scheme started under the Pension Fund Regulatory and Development Authority (PFRDA) to take care of employees’ post-retirement needs.

Why National Pension Scheme?

According to the data, the average life expectancy of Indian has increased from 62 years in the year 2000 to 69 years (estimated) in the year 2019. This is due to the availability of better medical facilities, sanitation conditions and health-conscious attitude in the country. As a result, the number of years of post-retirement life has increased. Therefore, one needs to have an appropriate plan to tackle the survival and regular requirements during the post-retirement years. This is where NPS comes in handy when there is a requirement of regular income for your monthly needs.

National Pension scheme

How does the National Pension Scheme work?

NPS is a low cost, efficient, and flexible scheme where employers and employees contribute to it. This contribution is then invested in the market and the corpus generated from the investment depends on the return from the investment. At the time of retirement, 40% of the corpus from NPS has to be mandatorily used to purchase annuities and rest 60% can be withdrawn in lumpsum.

What are the National pension scheme benefits and details?

Any citizen of India, resident, or non-resident between the age group between 18-60 years can join the scheme. Citizens can join the scheme as individuals and employer-employee groups after the KYC procedure. A Non-resident Indian can also join the scheme. The contributions made by NRI are subject to regularised by RBI and FEMA. Also, one can invest in NPS despite their contribution to the provident fund.

What is the procedure of joining the NPS scheme?

Online Method
  1. Visit PFRDA Website and click on Registration and “select Register with Aadhar”
  2. Enter Aadhar number and click generate OTP. After that insert, OTP sent to your mobile number.
  3. Enter your personal details along with OTP.
  4. Once the application is complete, click submit. After submission PRAN number will be allocated.
  5. Attach the photograph and click on the e-signature option.
  6. An OTP again will be sent on your mobile number.
  7. Enter the OTP to verify your signature and make the initial deposit.
Offline Mode

Any person interested to join the scheme needs to open the bank account. Almost all banks and a few selected financial institutions provide this facility. These banks and institutions assist the person in subscribing to the scheme and fill the necessary forms. Once the account is opened, the subscriber is issued a 12 digit unique number called Permanent Retirement Account Number (PRAN).

What are the documents required for opening the NPS account?

The subscriber would require the following documents for opening the account.

  1. Proof of Identity (POI)
  2. Proof of Address (POA)
  3. Proof of Date of Birth
  4. Subscriber registration form

Following are the documents that is considered as valid for POI and POA

Proof of Identity (POI)Proof of address (POA)
PassportPassport
Ration card with PhotoRation card with Photo and residential address
Bank Passbook or certificate with PhotoBank Passbook or certificate with Photo and residential address
Voters identity card with photoVoters identity card with photo and residential address
Valid Driving License with PhotoValid Driving License with photo and residential address
Pan CardLetter from any recognised public authority at level of Gazetted officer
Certificate of Identity signed by MP of MLACertificate of Identity with photo signed by MP of MLA.
Aadhar CardAadhar Card
Job cards issued by NREGA duly signed by officer of State Govt.Job cards issued by NREGA duly signed by officer of State Govt.
Photo identity issued by Defence, Govt., paramilitary and Police DepartmentLatest Electricity bill/ water bill in name of subscriber with address
Ex-Service Man card issued by Ministry of Defence to their employeesLatest Telephone bill in name of subscriber reflecting the address
Photo Credit CardLatest Property tax/House tax (not more than 6 months old.
 Existing valid registered lease agreement.
  

What are the types of accounts and funds managed by NPS?

NPS offers two types of accounts

  1. Tier – I
  2. Tier – II

Tier-I is a mandatory account and Tier-II is voluntary. The contribution in Tier I account cannot be withdrawn by the subscriber until he attains retirement or death, whichever is earlier. However for the Tier II account, the subscriber can withdraw entire money without any lock-in period.

There are various funds that are managed by Pension Fund Managers such as SBI Pension funds, UTI Retirement solutions, etc. NPS contribution is invested based on the subscriber’s choices.

Investment choice

  1. Active choice- This option allows a subscriber to decide how much should be invested in different assets
  2. Auto choice or lifecycle fund – In this option, the fund manager invests the money in different assets in line with the age of the subscriber.

Can a subscriber change his choice of investment?

Yes, the subscriber can change the investment choice but once in a financial year for both Tier I and Tier II accounts.

What is the minimum contribution in NPS?

A person must contribute a minimum of Rs. 6000 in a year in his Tier I account in a financial year. Any shortfall in minimum contribution to the scheme will lead to freezing of the NPS account.

What are the National Pension Scheme benefits in tax after investing in?

An employee’s own contribution is eligible for tax deduction upto10% of Basic salary and DA u/s 80CCD (1) within the ceiling limit of Rs. 1.5 lakhs eligible for section 80C.

The employer’s contribution is eligible for exemption u/s 80 CCD (2).

The above two deductions basically cannot exceed the limit and are interchangeable for exemption available under section 80C

Example – in case the person has contributed to NPS upto or above 1.50 lakhs and also has invested in instruments eligible for deduction in 80C, then he can claim either of deduction of Rs. 1.50 lakhs. In this case he can’t claim exemption in both sections.

A new amendment to Section 80CCD has been introduced w.e.f 2015 as 80CCD(1B). In this case, a person can additionally claim a deduction of Rs. 50,000 apart from Rs. 1.50 lakhs deduction above. This is available to both salaried and self-employed people.

Taking the above example, the person here would be eligible to claim a deduction of Rs. 1.50 lakhs u/s 80C and additional Rs. 50,000 u/s 80CCD(1B) for contributing to NPS. This means the subscriber can be availed the deduction of Rs. 2,00,000 in total.

Investment options – There are 3 investment options

  1. Asset Class E – This option invests in 50% in stocks
  2. Asset Class C – This option invests in fixed income instruments other than government securities
  3. Asset Class G – This option invests in government securities

An Investor can choose any of these options or opt for a combination of them.

What is the withdrawal procedure for NPS?

Being a pension product, it is expected to remain in the scheme till retirement. At retirement, 40% of the corpus is mandatorily used to buy annuity and rest 60% can be withdrawn in lumpsum. However out of 60%, 40% is tax free and rest 20% is taxable. This 20% can be deferred by purchasing annuity.

Income from annuity is again taxable in the hands of subscriber.

Can a subscriber avail partial withdrawal of money from National Pension Scheme?

Yes, there is a partial withdrawal facility available in NPS however there are certain conditions to be fulfilled.

  1. A subscriber can partially withdraw the amount provided the account is served minimum 3 years.
  2. The maximum amount that can be withdrawn during the tenure is limited to 25% of the self-contributions made by the subscriber in Tier I Account. However, there is no limit on restriction in withdrawal in the case of Tier II accounts.
  3. A subscriber can only withdraw only 3 times during the tenure of his/her subscription
  4. Partial withdrawal is allowed only in certain exceptional cases, like education of his/her children, marriage expenses, house construction, or medical emergencies.

NPS Exit at Maturity

After retirement (as per service rules) or attaining the age of 60 years you can do the following:

  • Continue to contribute to your NPS up to the age of 70 years (Circular by PFRDA on July 27, 2016)
  • Withdraw the lumpsum amount in 10 annual installments till the age of 70 years. This option can help you save on taxes! [Clarification by PFRDA on October 29, 2015]
  • Defer the purchase of a compulsory annuity plan (using minimum 40% corpus) up to 3 years. You will need to inform the concerned authorities at least 15 days in advance for taking this option. If the subscriber’s death occurs during this deferred period, then the spouse must buy the annuity.
  • Defer the withdrawal of lump-sum amount up to 70 years of age. In this case you have to bear the cost of maintenance of account and other regular charges as applicable.
  • No need to purchase Annuity if the maturity corpus is less than Rs 2 lakhs

Opinion

Well, the National Pension scheme benefits devised by Governments isn’t bad especially for people who fall in a 30% tax bracket. However, I think the major roadblock for the scheme to work out for other taxpayers is 40% compulsory annuity. If this percentage of 40% is removed or reduced then the National Pension scheme could gain momentum.

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