National Pension System
The NPS offers different funds with varying exposure to equity, corporate debt and government securities
By Research Desk | Apr 4, 2018
The NPS is a Government of India initiative to extend pension benefits to all Indian citizens. It is mandatory for central-government employees and the employees of some state governments to invest in the NPS. As per a government directive, private-sector employees will now be given a choice between the Employees' Provident Fund Organisation (EPFO) and the NPS. The employee contribution is generally 10 per cent of the basic salary and DA, with a matching contribution made by the employer.
Capital Protection & Inflation Protection
Your capital is not protected as the NPS invests a certain amount in equities. The returns are, therefore, market-linked. However equities are expected to beat inflation over the long term thus building a certain level of inflation protection into
Liquidity: In the case of the NPS, after three years of being in the scheme, you can withdraw up to 25 per cent of the contributions for defined expenses. These defined expenses are children's higher education or marriage, construction or purchase of the first house, and treatment of critical illness for self, spouse, children or dependent parents. The regulations have defined 13 critical illnesses and have extended this facility to accidents or other ailments of a life threatening nature.
The point to note is that the 25 percent limit will be calculated on the contributed amount, not on the account balance. Suppose you have contributed Rs 5,000 per month for ten years. You would be eligible to withdraw Rs 1.50 lakh, i.e., 25 per cent of Rs 6 lakh. You can make up to three withdrawals during the tenor.
Tier I: If you wish to exit before age 60, you must use 80 per cent of the corpus to buy an annuity. You can withdraw 20 per cent of your corpus, but it will be taxed as per your income-tax slab.
40 per cent withdrawals from the NPS are tax-free for those who retire at 60 years. Of the balance 60 per cent, you will have to use a minimum of 40 per cent towards the purchase of an annuity. The remaining 20 per cent can be withdrawn by paying tax as per your slab or can also be used to buy an annuity.
Tier II: In this voluntary account, you are free to withdraw your savings whenever your wish. There are no limits on deposits and withdrawals. Withdrawals will be taxed as per your slab.
Tax Implications: Tax deduction on investments up to Rs 1.5 lakh (under Section 80CCD) and Rs 50,000 [under Section 80CCD(1B)] can be availed in a financial year. Forty per cent of the amount received at the completion of the term is tax-free.
List of Pension Fund Managers (PFMs)
- HDFC Pension Management Company
- ICICI Prudential Life Insurance Company
- Kotak Mahindra Asset Management Company
- LIC Pension Fund
- Reliance Capital Asset Management Company
- SBI Pension Funds
- UTI Retirement Solutions
- Birla Sun Life Pension Management
The NPS offers different funds with varying exposure to equity (E), corporate debt (C) and government securities (G). Of these asset classes, equity carries the maximum risk (and chances of maximum returns) and government securities carry minimum risk (and least returns). Following are the investment options available:
Active-choice investment: The investor can mix the E, C and G options as per their choice. The maximum allocation towards equity is 50 per cent.
Auto-choice investment: Here investment allocation is done based on the investor's age. In default version of this scheme, the equity portion is 50 per cent till age 35, after which it reduces 2 per cent per year until it becomes 10 per cent by age 55. The corporate debt portion is 30 per cent till age 35, after which reduces 1 per cent per year until it becomes 10 per cent by age 55. Other options within auto-choice are the aggressive and conservative life-cycle funds which begin with an equity allocation of 75 per cent and 25 per cent respectively. These are reduced as the NPS subscriber's age advances.