Minimum contribution under NPS has been reduced to Rs 1,000

In a circular on 9 August, the Pension Fund Regulatory And Development Authority (PFRDA) reduced the minimum annual contribution requirement in the National Pension System (NPS) from ₹6,000 to ₹1,000, effective immediately. It also decided to unfreeze NPS accounts as a one-time measure to encourage investors to continue contributing to the NPS.

Contributions in NPS
NPS is a defined contribution pension plan in which you contribute till 60 years of age. The tier-1 account or the retirement account of the NPS is a long-term product that takes contributions from you every year and puts that money in investment funds of your choice. You can pick from three fund options: equity fund (in which you can't put more than half of your money currently), corporate bond fund and government securities fund. You can also choose a pension fund manager.

At 60, you can withdraw up to 60% of the accumulated corpus, but with the rest of the money, you need to buy annuity-a pension product that pays periodic income in your retirement days. Early withdrawals are discouraged by mandating you to annuitise at least 80% of the money. But partial withdrawals under some circumstances are allowed.

The minimum contribution requirement has been reduced to ₹1,000 in a year from ₹6,000 earlier.

NPS also has a tier-II account. This is optional and works like a savings account as you can make withdrawals whenever you want. But the investment pattern is similar to the pension account. If you opt for this account as well, till now you had to invest at least ₹250 in this account and maintain a minimum balance of ₹2,000 by the end of the financial year. The circular has waived off both the conditions. So, now you can skip contributions or have a zero balance account.

Unfreezing the account
As per NPS rules, if you skip on annual minimum contributions or don't maintain the minimum balance in your tier-II account, your account will be blocked. This freeze means you can't make further contributions, view your account online or request for changes. You will then have to unfreeze your account by paying a minimum contribution of ₹500 along with a one-time penalty of ₹100 along with a request to unfreeze your account. The penalty applies even in the case of the tier- II account.

But as a one-time measure, PFRDA has decided to unfreeze all accounts that were frozen due to non-contribution of the minimum amount and non-maintenance of the minimum balance. This means you don't have to pay a penalty or send a request to unfreeze your account. But, going forward, you will need to contribute at least ₹1,000 every year; else, the account will be frozen. To activate it again, said PFRDA officials, there won't be a penalty; you only have to make the minimum contribution of ₹500.

In arrangement with HT Syndication | MINT