National Pension System (NPS) is a government-sponsored pension scheme. It was launched in January 2004 for government employees. However, in 2009, it was opened to all sections. The scheme allows subscribers to contribute regularly in a pension account during their working life. On retirement, subscribers can withdraw a part of the corpus in a lumpsum and use the remaining corpus to buy an annuity to secure a regular income after retirement.
Investors get benefit under Section 80CCD (Maximum Limit - Rs 50,000/-) of the Income Tax Act.
Any Indian citizen between 18 and 60 years can join NPS. The only condition is that the person must comply with know your customer (KYC) norms.
What is a Permanent Retirement Account Number (PRAN)?
Every NPS subscriber is issued a card with 12-digit unique number called Permanent Retirement Account Number or PRAN.
What are Tier-I and Tier-II accounts?
NPS offers two accounts: Tier-I and Tier-II accounts. Tier-I is a mandatory account and Tier-II is voluntary. The big difference between the two is on withdrawal of money invested in them. You cannot withdraw the entire money from Tier-I account till your retirement. Even on retirement, there are restrictions on withdrawal on the Tier-I account. The subscriber is free to withdraw the entire money from the Tier-II account.
What is the minimum contribution in NPS?
You have to contribute a minimum of Rs 6,000 in your Tier-I account in a financial year.
What will happen if I don’t make the minimum contribution?
If you do not contribute the minimum amount, your account will be frozen. You can unfreeze the account by visiting the POP and pay the minimum required amount and a penalty of Rs 100.
What are the investment choices available in NPS?
The NPS offers two choices:
1) Active Choice: This option allows the investor to decide how the money should be invested in different assets.
2) Auto choice or lifecycle fund: This is the default option which invests money automatically in line with the age of the subscriber.
Can I change my investment choices?
Yes, you can change your investment choices once in a financial year for both Tier-I and Tier-II accounts.
What are the tax benefits available for NPS?
An employee’s own contribution is eligible for a tax deduction --up to 10 per cent of the salary (basic plus DA) – under Section 80CCD(1) of the Income Tax Act within the overall ceiling of Rs 1.5 lakh allowed under Section 80C and Section 80CCE.
The employer’s contribution to NPS is exempted under Section 80CCD (2).
Moreover, individuals can claim an additional deduction of up to Rs 50,000 under Section 80CCD (1B), which is in addition to Rs 1.5 lakh permitted under Section 80C.
A self-employed person can also contribute 10 per cent of his gross income under Section 80CCD (1) in NPS.
When can I withdraw money from NPS?
NPS is a pension product. So, you are expected to stay invested until your retirement. At 60, you must use at least 40 per cent of the corpus to buy an annuity income from a PFRDA-listed insurance company. You have the option to withdraw 40 per cent of the corpus tax-free. You can withdraw the remaining 20 per cent of the corpus (it will be taxed as per the income tax slab applicable to you) or use it to buy annuity.
What happens to the money if I discontinue the scheme?
If you discontinue your investment, your account will be frozen. You can reactivate the account only if you make the minimum contribution required along with the penalty.
Who manages the money invested in NPS?
The money invested in NPS is managed by PFRDA-registered Pension Fund Managers. At the moment, there are eight pension fund managers: 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, and DSP BlackRock Pension Fund Managers.