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National Pension System (NPS) is one of the best retirement benefit schemes introduced by the Government of India to plan for your finances after retirement. The scheme enables the subscribers to receive regular monthly income post retirement. The governing body for NPS is PFRDA (Pension Fund Regulatory and Development Authority) which regulates the activities.

Features of NPS

• NPS is based on unique Permanent Retirement Account Number (PRAN) which is allotted to every subscriber. NPS account or PRAN remains same irrespective of change in employment, city or state.
• It is a voluntary scheme for all citizens of India. You can invest any amount in your NPS account, anytime and any number of times during the year.
• You have the flexibility to select or change investment pattern and fund managers. This ensures that you can optimize returns as per your comfort with various asset class (Equity, Corporate Bonds, Government Securities and Alternate Assets) and fund managers.
• It is one of the lowest cost investment products available.
• NPS account holders can transfer their Superannuation funds to their NPS account without any tax implication. (Post approval from relevant authorities)
• It offers double tax benefits. First, you can claim tax exemption upto Rs 50,000 under section 80CCD (1B). This benefit is over an above limit of Rs. 1,50,000 under section 80C. You can invest upto 10% of your salary or 20% of your gross annual income (incase of self employed individuals) and claim tax exemption on the invested amount under section 80CCD(1). This tax exemption is subject to a limit of Rs. 1,50,000 under section 80C of Income Tax Act, 1961.

Types of NPS accounts

There are two types of accounts in NPS. You should ideally open both the accounts to take full benefit of this retirement tool.

• Tier I – It is also called as pension account. Contributions upto Rs 50,000 made in this account are eligible for additional deduction from taxable income under section 80CCD (1B). This is over and above limit of Rs 1.5 lakhs- under section 80C. Withdrawals are restricted and subject to terms and conditions. Also funds from Tier I account cannot be transferred to Tier II account.
• Tier II – You can invest an additional amount in Tier II account. You can withdraw your entire funds in Tier II account at any point of time. In case you have not contributed even the initial contribution towards Tier II a/c, it will be automatically deactivated as per process. No tax benefits are available in this account. Funds from Tier II can be transferred to Tier I.

The minimum contribution at the time of opening Tier I account is Rs 500. The minimum subsequent contribution is Rs 500. You have to invest minimum Rs 1,000 every year in Tier I account and contribution is required to be made every year.

For Tier II accounts, the minimum contribution at the time of opening the account is Rs 1,000. The minimum subsequent contribution is Rs 250. There is no mandatory requirement to make a minimum contribution every year after account opening.

Choosing how to invest your NPS contribution

In NPS, you have the option to choose how you want the money/your contribution to be invested. There are 4 categories – Equity (E), Corporate Debt (C), Government Securities (G) and Alternative Investment Funds (A). You have ‘auto’ choice and ‘active’ choice options to choose your investment pattern.

Auto Choice – In this option, the allocation between the above mentioned 4 categories happens automatically. This option, invests heavily in equity in the subscriber’s younger age and the allocation to equity reduces as the subscriber approaches retirement. This approach optimizes returns and also protects your investment from market volatility and downturns as you approach retirement.

Active Choice – In this option, the subscriber is free to decide how much amount he wants to put in each of the 4 categories. Subscribers can also switch their investments and change their fund managers subject to certain rules/constraints.

How to choose the fund manager for your NPS contributions?

The amount which is allocated to equity, is managed by mutual fund houses/asset management companies. Always opt for a time tested, time proven mutual fund house which has been in the industry for a long time and who has a good track record. NPS is a retirement tool, so it is important to protect your investment while making returns over a long period of time.

Where do mutual fund houses/fund managers invest the NPS contributions?

Mutual fund houses invest the NPS contributions, in equity or stock of large cap companies only. The rationale behind this being, NPS wants to maximize returns for subscribers while minimizing risks. Large cap companies are financially sound, well established and consistent performers. Mutual fund houses have to take a prudent approach as they have to manage investments in a nationwide pension system.