National Pension Scheme (NPS) is a government-backed retirement saving instrument. It is given the tag of being one of the best in the market by the investment pundits owing to its reliability, several tax-benefits and better returns. The NPS instrument allows an individual to invest in a pension scheme at regular intervals. At a time when global rankings term India as the worst place to retire,1 the NPS tool is becoming all the more important for salaried individuals working in the private sector as they are not eligible for a monthly pension from their organisation.
NPS discourages early withdrawals, as it is understood to be a retirement product. However, under special events it allows partial withdrawals. Various other features associated with the National Pension Scheme are:
The NPS account provides two categories to investors with Tier I being mandatory at the time of registration. Tier -II account is voluntary in nature.
Tier-I account is the non withdrawal account. You can withdraw the amount only after meeting the prescribed exit conditions under the NPS ( before retirement). This section is further divided into NPS (Central Govt), NPS (State Govt), NPS (Corporate) and NPS (All Citizens Models).
Tier-II account is voluntary withdrawal account, allowed only after an active Tier I account. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.
Investors can choose between 8 Fund Managers namely:
LIC Pension Fund Ltd.
Birla Sun Life Pension Management Limited
Kotak Mahindra Pension Fund Ltd.
ICICI Prudential Pension Fund Management Co. Ltd
HDFC Pension Management Co. Ltd.
Reliance Capital Pension Fund Ltd.
UTI Retirement Solutions Ltd
SBI Pension Funds Pvt. Ltd
Investor can choose from two investment strategies—active choice and auto choice. Active choice is for people demanding more command in their asset allocation whereas auto choice is for investors preferring a passive approach.
The instrument of NPS provides a unique number (PRAN) that remains with the subscriber throughout his lifetime. Unlike other pension plans this provides seamless portability across jobs and across locations.
NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDAI) with regular monitoring, simple and transparent investment norms and periodic performance review of fund managers by NPS Trust.
Tax Saving: A significant advantage of the NPS is that it is an efficient tax-saving tool. One can claim a deduction up to Rs 1.5 lakh for your contribution( and as the contribution of the employer )under Sections 80 CCD(1) and 80 CCD(2) of the Income Tax Act. Moreover, investors having access to NPS can claim extra tax benefits under Section 80CCD (1B) of the Income Tax Act, increasing potential tax deduction to Rs. 2 lakhs - a novel benefit.
An EEE Product: NPS has been effectively given an 'Exempt, Exempt, Exempt (EEE) 1status. Moreover, recently approved by the parliament after being tabled during 2019 Budget session, the income tax exemption limit on withdrawal from the NPS corpus, after retiring/reaching the age of 60, has been raised to 60% from an earlier figure of 40%. The residual 40% is invested in an annuity plan, allowing you to get a regular monthly pension post-retirement. This practically makes the entire corpus as tax-free. (However, the income from the annuity plan will be taxed as per the income slab). This step has reduced the tax burden of subscribers, comparatively.
NPS, being a market-linked scheme, functions as a mix of a pension and investment plan. The investors are free to choose the combination of equity and debt exposure according to their financial goals, commensurate with their risk appetite. The National Pension Scheme allows an investor to have four types of investment options - equities, government securities, corporate debt and alternate assets. If at any stage the investor is not satisfied with the funds' performance, he/she can switch between 8 pension funds/pension fund managers. Further as mentioned before, the allotment of unique Permanent Retirement Account Number (PRAN) with every NPS increases its portability as one may not open a new account every-time a job is changed.
India being demographically classified as a young country, the government to lure this cohort ( 20-35 ) has sensibly increased the cap of equity asset allocation from 50% to 75%. This gives investors, having a higher risk appetite, the opportunity to grow their retirement funds with higher return.
Increasing the equity asset allocation cap to 75% has empowered the investor to increase its market exposure and maximise the potential gain. However, at the same time, a risk-averse investor can increase the percentage share in government bonds and fixed-return instruments, which protects from fluctuations in the equity markets. Thus, the government has taken care of both sides of an investor - aggressive and defensive. Further, the registered pension funds for NPS subscribers have produced excellent returns over the last five years; upwards of 18% per annum.
Being a government-supported instrument, NPS has been psychologically consumed by a good percentage of investors smoothly. As an adjunct, it has proved to be a reliable tool with a low-cost structure, ample tax benefits, adaptability and good returns.
In the age of rising medical costs, inflation, vulnerable economic conditions, generating a substantial post-retirement income becomes essential. The NPS attempts to provide an umbrella solution to all ages, giving enough flexibility to tailor a plan according to the changing needs. Such features and benefits of National Pension Scheme have allowed this investment tool to top charts for a while now. Owing to the tax-benefits, especially, it has been preferred by most individuals belonging to the working class.
On Finserv MARKETS, you can subscribe to the National Pension Scheme completely paperless, thus, allowing you to experience these benefits with utmost transparency. Additionally, the National Pension Scheme account, created through Finserv MARKETS, can be accessed from anywhere. Even if the subscriber changes jobs or moves cities, they can track their NPS account on Finserv MARKETS.
To be listed as an EEE, the product should qualify the following 3 exemptions.