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Overview on NPS
The National Pension System (NPS), earlier known as the New Pension Scheme, is a pension system open to all citizens of India. The NPS invests the contributions of its subscribers into various money market instruments linked such as equities and debts and the final pension amount depends on the performance of these investments options.
Any Indian citizen in the age group of 18-60 can open an NPS account. NPS is administered and regulated by the Pension Fund Regulatory Authority of India (PFRDA). The NPS matures at the age of 60 but can be extended until the age of 70.
Partial withdrawals up to 25% of your contributions can be made from the NPS after three years of account opening but for particular goals like home buying, children’s education or severe illness.
National Pension Scheme
National Pension Scheme is the most affordable market-linked retirement plan among all other Retirement plans (EPF, PPF and Mutual Funds) suggests that it would have shown the maximum amount of sales. But due to extremely less payment of incentive/commission to the intermediaries, it is not getting promoted by them.
The Situation when the scheme was launched was worse, the fund management cost was limited at 0.0009 percent and points of presence, or PoPs, where investors open the account, were not allowed to charge more than Rs 20 per account, regardless of how big the investment was. Then there was an account opening cost of Rs 50 for the central record-keeping agency, or CRA, in addition to an annual CRA fee of Rs 225.
The fund management fee for non-government funds has now increased to 0.25 percent and for government funds, it has increased by 0.0102 percent. Also, POPs are permitted to charge Rs.100 plus 0.25 percent of the investment. This change will surely act as an encouragement for the agents who will now actively market the product.
Top Performing NPS Schemes
| Scheme Name | 1-year returns | 3 years return | 5 years return |
|---|---|---|---|
| LIC Pension Fund – Tier II | 24.11 | 12.37 | 12.34 |
| LIC Pension Fund – Tier I | 23.1 | 12.08 | 12.31 |
| HDFC Pension Fund-Tier I | 19.95 | 10.07 | 11.17 |
| Kotak Pension Fund-Tier I | 20.38 | 10.19 | 11.28 |
| Birla Sun Life Pension Scheme –Tier I | 19.82 | – | – |
| Birla Sun Life Pension Scheme –Tier II | 19.74 | – | – |
| ICICI Prudential Pension Fund-Tier I | 20.00 | 10.24 | 11.32 |
| ICICI Prudential Pension Fund-Tier II | 13.22 | 9.16 | 10.31 |
| Reliance Capital Pension Fund-Tier II | 13.26 | 9.34 | 10.87 |
| SBI Pension Fund-Tier I | 13.19 | 9.01 | 9.99 |
Features of NPS
As a government-sponsored pension scheme, some of the salient features of NPS are:
- A portion of the national pension scheme goes into equities.
- The returns offered by National Pension Scheme are much higher as compared to the traditional tax-saving investment instrument such as PPF.
- NPS offers 8%-10% annualized returns.
- In case if the individual is dissatisfied with the performance of the fund then he/she can change the fund manager.
- Up to the maximum deduction of Rs. 1.5 lakh can be claimed in NPS under section 80C of the Income Tax Act.
- For tier-I account, the subscribers are required to make a yearly contribution of Rs.6000 and Rs500 as a one-time contribution. For tier-II account, the subscribers are required to make a yearly contribution of Rs.2000 and Rs.250 one-time contribution.
- One cannot withdrawal the entire corpus from the national pension scheme after retirement.
- In NPS account one can only withdraw 60% of the fund after retirement and the rest 40% of the fund is invested in the pension scheme in order to receive a regular pension.
- An individual can open an NPS account through an online or offline process.
- One can make a withdrawal for up to 3 times within 5 years of intervals in the entire tenure.
- After completion of 3 consecutive years of NPS account, one can make a withdrawal of up to 25% for a specific purpose such as medical treatment, higher education, marriage, buying a house, etc.
Steps for online account opening
- The subscriber can enroll for NPS by clicking on the ‘Apply Now’ option under NPS (National Pension System)
- Subscriber will get the online form, which needs to be filled with mandatory fields.
- Receipt number for subscriber registration (account opening) will be created. There will be provided to complete the registration (account opening) later based on receipt number search.
- Subscriber’s KYC will be made through Aadhaar (OTP based authentication).
- The subscriber enters remaining details like Bank details, scheme details, nominee details, etc.
- There is a need to upload photograph and signature (Cheque and PAN for Tier II).
- Subscriber will enter the contribution amount (this is the amount subscriber needs to invest in NPS) and succeed for payment.
- Subscriber will be directed to an online payment platform wherein the subscriber will complete the payment through HDFC Bank NetBanking.
- On successful payment, PRAN will be allotted to the subscriber and PDF form will be generated based on data given. This can be kept for reference and need not be sent individually (This is only applicable for Aadhaar based NPS account opening).
Different types of NPS accounts
Tier-I and Tier-II are the two kinds of NPS accounts. While the Tier-I is a mandatory account, the Tier-II is a voluntary account. The differences between the two accounts are mentioned in the table below:
| Category | Tier-I account | Tier-II account |
|---|---|---|
| Maximum contribution | Limitless to the amount of contribution | Limitless to the amount of contribution that is made towards the account |
| Minimum contribution | Rs.500 or Rs.1,000 in a year must be made towards the account | Rs.250 must be made towards the account |
| Tax deductions | Subscribers are eligible for a tax deduction of up to Rs.2 lakh. | Subscribers are not eligible for tax deductions under the account. |
| Withdrawals that are allowed | Subscribers cannot withdraw the investments done towards the account until they retire. | Subscribers will be able to withdraw the contributions made towards the account. |
| Status | It is a necessary account for subscribers who register for an NPS account. | Subscribers can open the account on a voluntary basis. |
The NPS account is compulsory for all Central Government employees. They will have to contribute 10% of their primary salary towards NPS. The NPS scheme is optional for all other Indian citizens.
Differences between the NPS and other tax-saving schemes
Some of the other schemes that grant tax benefits under Section 80C of the Income Tax Act are Tax-saving Fixed Deposits (FD), Public Provident Fund (PPF), and Equity Linked Savings Scheme (ELSS). The difference between NPS and the schemes mentioned above are compared in the table given below:
| Type of scheme | Rate of interest (p.a.) | A fixed period of investment | Risks of the scheme |
|---|---|---|---|
| NPS | The normal rate of interest is between 8% to 10% | Investment towards the scheme is till retirement | The returns on investments are market-related. |
| FD | The rate of interest is sure and is between 7% to 9%. | 5 years | The scheme is risk-free. |
| PPF | The rate of interest is sure and is 8%. | 15 years | It is a risk-free scheme. |
| ELSS | The expected rate of interest is from 12% to 15%. | 3 years | The returns depend on the market. |
Even though the returns that are created from the scheme may be greater than PPF and FD, however, there are no tax benefits on maturity. Individuals who withdraw 60% of the total investments that have been proceeded towards the account, should know that 20% of that value is taxable. However, the taxable amount may vary.
Conclusion
The multiple benefits discussed above show why this scheme is better than other pension plans in the market. But unfortunately, it is one of the underrated plans, as a lot of individuals are not aware of it. Both employers and government bodies need to spread awareness among working individuals so that more and more individuals can enjoy their benefits. To enjoy the maximum benefits of this plan, you must read the features of funds associated with this plan.
Our expert services at WealthBucket will guide you for the National Pension System hassle-free. Our team only believes in over-delivering our clients when you want to invest in equity funds, large-cap funds, liquid funds or multi-cap funds & many more. You can either contact us at +91 9999379929 or email us at contact@wealthbucket.in.
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