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ULIP INSURANCE

Right Way to Invest in the National Pension Scheme

Jagrity Sharma Jagrity Sharma 23 July 2019
5.0 (3 votes)

Investing in NPS schemes gives you an additional tax advantage. Read on to know about the best way of investing in the scheme.

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One of the many mediums to invest right is NPS. National Pension Scheme is an initiative taken by the Central Government for social security. This retirement program is available to employees from the private, public and the unorganized sectors, except for the ones from the armed force. The system promotes individuals to invest regularly during their employment in a pension account. A certain percentage of the collection in pension account can be taken out by the subscribers after retirement. The balance amount will be obtained as a monthly pension after retirement.

Previously, only the employees of Central Government were covered by the NPS scheme. However, Pension Fund Regulatory and Development Authority (PFRDA) has made it voluntarily available for all Indian Citizens. This scheme has enormous value for those employees who work in the private sector and need regular pension after retirement. NPS has a tax benefit under Section 80CCD(1).

NPS is a nice plan for those who wish to retire early and have less risk. Regular pension after retirement will certainly be a boon for those employees who have retired from the job of the private sector. Such systematic investment creates a huge change in your after-retirement lives. In fact, the employees who wish to avail the most use of Section 80CCD(1) deduction can take this scheme into consideration. A part of the NPS goes to equity. However, it provides far more returns than other tax-saving traditional investments such as PPF. This system is in force for a period of more than ten years, with annualized yields of 8% to 10% so far.

How to choose your investment option in NPS?

In NPS, if you are not pleased with the fund’s results, you may also alter your fund manager. After retirement, an individual cannot withdraw the whole collection of NPS scheme. In order to obtain a regular pension from PFRDA, you have to keep aside at least the 40% of the collection away and rest 60% is tax-free. The NPS is investing in various scheme and NPS’s Scheme E invests in equity. A maximum of 50% of your investment can be allocated to equity shares.

It is vital to know that investment can be made in two options i.e. auto choice and active choice. The auto choice determines your investment’s risk profile according to your age. For instance, the investments become stable and less risky if your age is more. The active choice makes it possible to decide the scheme and divide your investments. It is essential that you continue to invest in a pension scheme until the age of 60.

You can, however, withdraw up to 25% of NPS for specific purposes if you have been investing for at least 3 years. Specific purposes include higher education or the wedding of children, medical treatment of self/family, constructing/buying a house, etc. Withdrawal can be made up to 3 times in the entire tenure. Each withdrawal made must have a gap of at least 5 years. These restrictions are only applicable on account of Tier-I and not on Tier-II. There is two primary accounts of NPS: Tier-I and Tier-II. Tier-I is a default account whereas Tier-II is a voluntary account.

The table below provides details of the two accounts

DetailsTier-ITier-II
Exemption from taxUnder 80C and 80CCD(1), up to Rs. 2 lakhUnder 80C and 80CCD(1), up to Rs. 2 lakh
WithdrawalsNot allowedAllowed
Minimum contributionRs. 500- Rs. 1000 per annumRs. 250
Maximum ContributionNo limitNo limit

For those who choose the NPS scheme, the Tier-I account is mandatory. Employees of Central Government must contribute basic salary’s 10% and for the rest, NPS is a voluntary investment option. Tax deduction of up to Rs. 2 lakhs can be claimed for NPS which includes the contribution of employer and as well as yours’s contribution.

Tax advantage under NPS

  • Section 80CCD(1): Self-contribution is covered under this section which is part of Section 80C. The maximum deduction one is eligible to claim is 10% of the salary but should exceed the said limit. The limit for the self-employed individual who is paying tax is 20% of the gross income.
  • Section 80CCD(2): Employer’s contribution is covered under this section which does not get covered under Section 80C. This benefit cannot be availed by the self-employed taxpayers. The maximum deduction that can be availed can be detailed as Actual contribution made by the employer in NPS or 10% of Basic Salary + Dearness Allowance; whichever is lower.
  • Under Section 80CCD(1B): Up to Rs. 50,000 deduction can be claimed as additional self-contribution.

PFRDA controls NPS operations and offers both online and offline method of opening this account. You will first have to find a PoP (Point of Presence) to start an NPS account offline or manually. Collect from nearest PoP a subscriber form and submit Know Your Customer (KYC) documents along with the form. Ignore if the bank already meets your KYC requirements. Once the initial investment has been made, PoP will give a Permanent Retirement Account Number (PRAN).

Number and password given in a sealed welcome kit will help in operating and managing the account. One-time registration fee is Rs. 125 for the above process. In less than half an hour, the NPS account can be opened online. Visit www.enps.nsdl.com to open an account online. It’s simple to open an account online if an individual links its account with PAN, Aadhaar and mobile number. One Time Password (OTP) will be sent to your mobile number which you need to input to complete the registration. After this, your PRAN will be generated which will help you in NPS login.

There are other tax-saving investment options under Section 80C apart from the NPS. Tax-saving instruments are Equity Linked Savings Scheme (ELSS), Fixed Deposits (FD) and Public Provident Fund (PPF). NPS may obtain better returns than PPF and FD but at maturity, it is not tax-efficient.

How to exit from NPS?

In the following 3 conditions, the subscriber can exit from NPS, as per PFRDA Regulations 2015:

  1. On attaining the age of 60, 40% of the accumulated pension amount has to be used by the subscriber to purchase an annuity, so that it receives a regular monthly pension and the rest of the funds can be withdrawn in a lump sum. In case the accumulated amount is less than or equal to Rs. 2 lakhs, then 100% withdrawal can be done.
  1. In case of the death of the subscriber, then 100% of the accumulated amount will be given to the subscriber’s legal heir/nominee.
  1. Only after completion of 10 years subscriber can exit from NPS. In case of an early exit, 80% of the accumulated amount should be used for the purchase of an annuity in order to receive a regular pension and the rest of funds can be withdrawn in a lump sum. On investing in NPS scheme, one must see that National Pension Scheme benefits match with their risk profile. Thus, NPS is a very good scheme for the long term retirement plan, but risk profiling needs to be done very carefully as the returns are marked to the market and with lesser flexibilities than other investment avenues.

Recommended Read: PPF Account: How to make the most of this tax-free Investment Option?

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Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!