What is 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 commitments of its subscribers into different market-linked instruments, for example, equities and debts and the last pension sum depend on the performance of these investments. It has an applicable interest rate of 12% to 14% on commitments made.
Any Indian citizen in the age gathering of 18-60 can open a NPS account. NPS is administered and regulated by the Pension Fund Regulatory Authority of India (PFRDA). The NPS matures at 60 years old yet can be extended until the age of 70.
Fractional withdrawals up to 25% of your commitments can be made from the NPS after three years of account opening however for specific purposes like home purchasing, children’s education or serious illness.
NPS Asset Classes
- National Pension System (NPS): Eligibility, Types, Investment and Charges
The National Pension System has four asset classes. Asset Class E invests in equities or stocks. Asset Class C invests in Corporate Bonds. Asset Class G invests in Central and State Government Bonds and Asset Class An invests in alternative assets like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs).
- Investment Choice and NPS Asset Allocation
Under National Pension Schemes, you can either pick your own asset distribution (Active Choice) or outsource it to your NPS fund manager (Auto choice). It is recommended to choose Auto Choice until you have great knowledge and experience of investing in market linked investment alternatives.
- Active Choice
In Active Choice, the subscriber picks the desirable split of his NPS deposits between equities, corporate securities, government securities and alternative assets all alone. The NPS subscriber needs to provide Pension Fund Managers (PFM), asset portion network and the percentage designation to be done to each of the asset classes of NPS.
Out of the 4 asset classes i.e equity, corporate securities, government securities and alternative assets, the allotment to equities can’t be more than 75% of the corpus and that also is substantial just as long as 50 years of age. From 51 years onwards the portion to equity begins tapering off as per a defined grid. Correspondingly, your commitment towards Alternative Investment Funds (AIF) can not be more than 5% of your corpus.
- Auto Choice
In Auto Choice, the lifecycle fund that you have chosen does the asset distribution process for you (most extreme equity assignment is again 75%). The fund additionally consequently rebalances your asset designation as you get older towards less equity and more debt.
You can change your asset distribution up to two times in a money related year. Asset Class An (Alternative Assets) is just offered in NPS Active Choice and as far as possible for investing in it is 5% of your corpus.
NPS Returns
NPS does not have a fixed interest rate yet the returns are market-linked. Money contributed to the NPS account can be invested in up to 4 asset classes – equities, corporate securities, government securities and alternative assets through different pension funds. These pension funds earn returns linked to the performance of stocks and securities.
Types of NPS Accounts
- Tier I Account: This account carries a tax deduction under Section 80C up to Rs 1.5 lakh per annum and an extra sum up to Rs 50,000 per annum under Section 80CCD (1B).
This is non-withdrawable permanent retirement account. On development i.e at 60 years old, 60% of the corpus which is tax-free can be pulled back. Another 40% should compulsorily be used to purchase an annuity. The balance 20% can either be used to purchase an annuity or can be pulled back after paying tax. However, as per the announcements made in the Union Budget 2019, the NPS corpus that can be pulled back at the time of retirement i.e 60% of the all out accumulated corpus would be tax exempt from FY 2020-21. The move makes NPS at standard with other sparing schemes, for example, PPF and EPF in terms of tax treatment.
- Tier II Account: This is an intentional retirement-cum-savings account that can be opened just on the off chance that you have a Tier I account. Subscribers are free to invest or pull back their funds anytime as per their convenience. This account has no tax deductions, for private sector employees or self-employed persons.
While presenting Union Budget 2019, the finance minister Nirmala Sitharaman announced that from FY 2020-21, tax benefits can be claimed on Tier II accounts commitments yet with lock-in period, in this manner making it at standard with Equity Linked Saving Schemes (ELSS).
NPS Tax Treatment
- Tax Benefits on Investment
NPS subscribers can guarantee tax benefits on investment upto Rs. 1.5 lakh under section 80C of the Income Tax Act, 1961. The deduction comes under the overall upper constraint of Rs. 1.5 lakh under section 80C.
NPS investors can guarantee extra tax benefits on investments upto Rs. 50,000 over or more the restriction of Rs. 1.5 lakh under section 80CCD (1b).
Over or more the investment furthest reaches of Rs. 1.5 lakh under section 80C and breaking point of Rs. 50,000 under section 80CCD (1b), tax benefits can be claimed on the commitments from the employer upto 10% of the fundamental compensation of the employee under section 80CCD (2). This deduction is available just for employees and there is no upper breaking point on that.
- Tax Benefits on Returns
NPS returns are market linked and therefore returns depend on the performance on broader market performance. However, returns earned on NPS investments are entirely tax exempt.
- Tax Benefits on Maturity
NPS account matures at 60 years old. However, just 60% of the accumulated corpus can be pulled back at the time of development. It is required to invest rest 40% of the corpus in annuity.
Out of the 60% pulled back as single amount, just 40% was tax exempt till now. Rest 20% was taxable as per the income tax slab of the subscriber. However, the government has extended tax benefits on the entire 60% pulled back as lumpsum at the time of development from FY 2020-21 as announced in the Union Budget 2019. This makes NPS a completely tax free investment item.
NPS Architecture
NPS architecture comprise of NPS trust which is entrusted with the responsibility of protecting subscribers interests, a Central Record Keeping Agency (CRA) to keep up information and records, Point of Presence (PoPs) and aggregators going about as collection and appropriation arm and competing pension fund managers who make efforts to maximize returns of their subscribers.
In the Union Budget 2019, the government has announced its decision to separate NPS trust from PFRDA to saferguard wider interests of the NPS subscribers and keep up a safe distance relationship of NPS trust from PFRDA.
What is the role of CRAs and PoPs?
Central Record-Keeping Agencies or CRAs issue you a PRAN (Permanent Retirement Account Number) Card and keep up your NPS account. They additionally process withdrawals and exits from the National Pension Schemes. You can make commitments directly on their websites and put in a request for change of pension fund manager, asset designation or KYC details like an address. The two NPS CRAs are NSDL and Karvy.
PoPs or Points of Presence are intermediaries who facilitate account opening, accept commitments (both physical checks and online) and update your details on request. In return, they get a commission from your NPS corpus. This is 0.25% of each offline commitment and 0.1% of each online commitment.
Which pension funds are listed under NPS?
At present there are 8 fund managers who are dealing with the deposits of NPS subscribers to maximize returns:
- Birla Sun Life Pension Fund Ltd
- HDFC Pension Management Co. Ltd
- ICICI Prudential Pension Fund Management Ltd
- Kotak Mahindra Pension Funds Ltd
- LIC Pension Fund Ltd
- Reliance Capital Pension Fund Ltd
- SBI Pension Fund Pvt. Ltd
- UTI Retirement Solutions Ltd
How to open a NPS account?
You can open a NPS account in both online just as offline mode.
- In the event that you have an Aadhar Card, PAN Card and bank account, you can open a NPS account online at enps.nsdl.com or enps.karvy.com. These are the portals of the Central Record Keeping Agencies (CRAs) in the NPS.
- In the event that you prefer to open NPS account offline (in person) you can go to your nearest NPS Point-of-Presence (PoP) which is commonly a designated branch of your bank.
- In either case (online or offline account opening), you can make commitments, change key details, change fund managers and initiate withdrawals online at enps.nsdl.com.
National Pension Scheme Login
To login your NPS Account, you are required to have an official NPS account and PRAN (Permanent Retirement Account Number). PRAN is a unique 12-digit number that identifies those people who have registered themselves under the National Pension Scheme (NPS).
Once you have generated your NPS Account and PRAN, you can process your NPS Login through different channels-
NPS Login through NSDL NPS Portal
- Login to http://www.npscra.nsdl.co.in/
- Presently, click on “Open your NPS Account/Contribute Online”
- On the redirected page, select “Login with PRAN/IPIN”
- Insert your PRAN and Password
- Snap on “Proceed” and Submit to view your E-NPS account
*If you are accessing your account just because, follow the steps mentioned below and create a new secret word-
- Go to https://npscra.nsdl.co.in/
- Select “Open your NPS Account/Contribute Online”
- Snap on “Login with PRAN/IPIN” on the page
- Presently, on the sign in screen, click “Secret word for e-NPS”
- Generate your new secret word
- Insert all the required details-PRAN, Date of Birth, New Password
- Affirm Password and Click on “Submit”
- An OTP will be sent to your registered mobile number. Enter the OTP to affirm your new secret phrase
NPS Login by means of Karvy NPS Portal
- Go to https://enps.karvy.com/Login/Login
- Snap on “Existing Subscriber Login”
- Enter your PRAN and Password to access the e-NPS Portal
Note: E-NPS Portal is accessible through internet banking websites of different Banks also. You can sign in to your respective banking website and navigate to NPS page to view all the account details.
How to check NPS balance online?
You can check the current value of your NPS investment online by following the steps mentioned below:
- Visit the NPS login page on NSDL website
- Enter your PRAN as user id and secret phrase to login to your NPS account
- Once you have successfully logged in, click on the “Exchange Statement” tab
- You can download your both of your “Holding Statement” just as “Exchange Statement” by tapping on either choice starting from the drop menu
NPS Contribution
In NPS Tier 1, the base introductory commitment is Rs 500. However, the base yearly commitment to your NPS Tier I account is Rs 1,000. There is no most extreme yearly commitment. The base sum per commitment is Rs 500.
In NPS Tier 2, the base starting commitment is Rs 1,000. There is no base or most extreme yearly commitment. The base sum per commitment is Rs 250.
NPS Charges
National Pension Schemes is one of the cheapest investment items available with extremely low charges. Pension Fund Manager fees are capped at 0.01% compared to 2-2.5% for common funds.
NPS Models
National Pension Schemes has different models. NPS (Central Government) and NPS (State Government) are open to government employees as it were. The asset distribution and pension fund manager selection is decided by the government.
However, in a press conference held on tenth December 2018 Finance Minister Arun Jaitley spread out certain major changes. The Central Government commitment will be enhanced from 10% to 14% of the month to month pay + dearness allowance. The employee commitment would be kept unchanged at 10% of the month to month pay + dearness allowance. Central Government employees would likewise be able to choose 1 of the 4 alternatives: 100% fixed income, 85% fixed income, 75% fixed income and half fixed income, with the balance in equity.
These changes have been notified by the government while presenting the Union Budget 2019.
The choice would depend on their individual hazard tolerance. They would likewise be able to choose any of the 8 fund managers in the NPS. Central Government employees would likewise get a deduction for Tier 2 commitments up to Rs 1.5 lakh per annum. State Government employees will likewise enjoy the same benefits once their respective states receive the same changes in their State Government models.
NPS (Corporate) is open to the employees of firms who have registered for the NPS. The asset assignment here is decided by the firm (employer).
NPS (All Citizens) is open to all citizens of India including those employees whose companies are not registered with NPS corporate, those people who are self-employed or even unemployed/retired people.
You can move between NPS (Central/State Government), NPS Corporate and NPS (All Citizens) in the event that you move starting with one sector then onto the next. To do this, you have to fill the Inter Sector Shifting (ISS) form.
NPS Withdrawals
You can make up to three incomplete withdrawals from the NPS during the entire tenure of the account.
The primary such withdrawal can be made after 3 years from account opening.
The most extreme sum that can be pulled back through incomplete withdrawals is 25% of your commitment. This ceiling applies to each of the three withdrawals set up. For example, you can pull back 10%, 10% and 5% in three tranches.
Fractional withdrawals from the NPS are tax-free.
In case of a NPS Tier 2 account, there is no lock-in and hence there is no restriction on withdrawals. However, withdrawals from the NPS Tier II account are completely taxable at the slab rate. As per Union Budget 2019, NPS subscribers can get a tax deduction on their investment in the NPS Tier II account. However, in this case, there is a lock-in of 3 years. They can pull back their entire NPS Tier II investment thereafter. You can likewise go for a premature exit after completing 3 years in the NPS. In the event that you choose this choice, you can pull back just 20% of your accumulated corpus and this withdrawal will be taxed at your slab rate. The balance 80% must be used to purchase an annuity (regular pension). The annuity will be completely taxable. The NPS account matures at 60 years old. You can pull back 60% of your accumulated corpus after that age. This withdrawal will be tax-free.
In the event that the subscriber needs to exit from the scheme, he/she have to present a completely filled withdrawal application form alongside required documents to the POP-SP. The POP-SP will advance the form to the CRA (NSDL e-Governance Infrastructure Limited) after authenticating the documents.
The subscriber’s case will be registered and CRA will advance the application form. The CRA likewise helps subscribers by giving necessary information about required documents. Once the documents are received and verified, the application will be processed and CRA will settle the account.
NPS Calculator
NPS Calculator is a unique instrument that you can utilize so as to estimate your future month to month pension and potential investment corpus created through deposits into the NPS account till retirement. NPS number cruncher ordinarily features the accompanying fields:
- Date of Birth – This is used to calculate your current age and figure out for how long you will be making NPS deposits.
- Commitment – This can be yearly, semiannual, quarterly or month to month and indicates the periodic commitment being made to the National Pension Schemes Tier 1 account (Tier 2 account does not have tax benefits or withdrawal confinements).
- Expected rate of return – NPS investments are market-linked hence their returns can’t be predicted in advance. In this manner the expected rate of return (expressed as a percentage value) is used to calculate the future corpus value of your NPS commitments. Higher the value in this field, higher is the last corpus size.
- Annuity Purchase – This percentage figure indicates the segment of your NPS future corpus that will be used to purchase annuities that determine your month to month pension after retirement.
Under existing rules, a base 40% of NPS corpus is to be obligatorily used for the purchase of annuities. Higher the bit of NPS future corpus used for annuity purchase, greater will be the month to month pension that you will get.
- Annuity Rate – This is the expected rate at which annuities are expected to develop after your retirement. Higher annuity rate will lead to higher pension payout. However, the annuity rate is additionally market-linked hence, can’t be predicted accurately in advance.
NPS Calculator Results
After contribution of the above information, the NPS number cruncher will show the month to month pension sum that you are likely to receive after your retirement. Furthermore, you will likewise receive information regarding the chief sum invested, the returns earned just as a break-up of the annuity corpus and singular amount payout. These results obtained from the NPS mini-computer are however subject to the accompanying constraints:
NPS being market-linked, the corpus sum is an estimate based on user input.
NPS number cruncher uses the accruing funds adding machine to provide its results hence genuine development of corpus won’t coordinate the estimated development of the corpus.
The development of annuity corpus is likewise market-linked hence the estimate might be very different from genuine payout at retirement.
What amount pension will you get in the NPS?
This depends on the performance of your NPS funds. Your commitments invested in the National Pension Schemes are invested in assets like equity or debt and earn returns. Your corpus is in this way expected to steadily develop over time.
When you hit the age of 60, you can use the accumulated corpus to purchase an annuity (month to month pension). The real pension you get along these lines depends on the corpus size and the prevailing annuity rates.
For example, if your corpus is Rs 1 crore and the prevailing annuity rate for a simple annuity is 8%, you will get a yearly payment of Rs 8 lakh. This translates to a month to month pension of Rs 66,666.
What is an annuity? How can it work?
An annuity is a fixed payment that you get for the rest of your life in return for paying the annuity provider a single amount sum. For example, paying the annuity provider Rs 10 lakh may get you an annuity of Rs 75,000 per year for the rest of your life.
There are a wide range of types of annuities. An annuity simple pays you an entirety of money for the rest of your life and terminates thereafter. In the event that you die early, the annuity provider (ordinarily an insurance organization) may get to keep a higher sum than what it has paid you.
However, the annuity provider additionally bears the danger of you living longer than expected and it needs to pay you much more than the singular amount you have paid. Another type of annuity called annuity certain pays a whole of money for a defined period (state 10-15 years) even on the off chance that you die before this period. The entirety of money will be paid to your nominees.
Yet another type is called annuity with return of purchase price. In this type of annuity, your nominees are addressed back the cost (singular amount) you have paid to purchase the annuity, upon your death.
In general, the more favorable the annuity features, the lower the annuity rate is.
Currently, there are five Annuity Service Providers (ASPs) which provide annuity services to NPS subscribers. These are LIC, SBI Life Insurance Co. Ltd., ICICI Prudential Life Insurance Co. Ltd., HDFC Standard Life Insurance Co. Ltd., and Star Union Dai-Chi Life Insurance Co. Ltd.
In what capacity would it be a good idea for me to divide my NPS funds between asset classes E,C,G and A?
That depends on your hazard appetite. On the off chance that you are not sure of it, basically select a NPS lifecycle fund. These funds will consequently set your asset designation as indicated by your age and rebalance it every year.
How might I choose a Pension Fund Manager (PFM) in the NPS?
You have to analyze the previous performance of the different pension fund managers. You can get information on this at http://www.npstrust.org.in/return-of-nps-scheme. You can likewise change your NPS fund manager once in a budgetary year.
There are eight fund management companies in the National Pension Schemes.
- ICICI Prudential Pension Fund
- LIC Pension Fund
- Kotak Mahindra Pension Fund
- Reliance Capital Pension Fund
- SBI Pension Fund
- UTI Retirement Solutions Pension Fund
- HDFC Pension Management Company
- Pension fund of Birla Sunlife Insurance
There is likewise a default fund manager arrangement under NPS under i.e. SBI Pension Funds Private Ltd. This remains the default PFM if the subscriber has not chosen any PFM without anyone else. The funds of government subscribers in the National Pension Schemes are managed by the three open sector pension fund managers – LIC Pension Fund, UTI Retirement Solutions and SBI Pension Fund.
However this is set to change. As per the press conference held on tenth December, 2018 government employees will in the blink of an eye be allowed to choose between all the pension fund managers in the NPS.
National Pension Schemes Benefits
NPS is a benefiting scheme to invest in as the investments are made into equities which can be hazardous yet additionally offer higher returns as compared to other tax sparing investment schemes like Public Provident Fund. Up until now, the scheme has delivered 8% to 10% annualized returns
The tax benefits available under NPS are the most significant reason why one ought to consider investing in this scheme. As a drawn out investment scheme, it permits a tax deduction of most extreme Rs.1.5 lakh under Section 80C, 80CCD(1) and 80CCD(2). Moreover, the subscribers are eligible to get an extra benefit of Rs.50,000 which can be claimed by the investor as tax benefit under Section 80CCD(1B)
Since it is a pension scheme, you should keep yourself invested until the age of 60 years. However, NPS permits the subscribers to make premature fractional withdrawals under special cases. A limit of 25% of the accumulated sum can be halfway pulled back after completion of in any event 5 years of ceaseless commitments in the fund. The same can be processed to outfit Child’s marriage, Higher education, Buying house or medical emergencies.