The National Pension System (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 are now 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. However, in the case of government employees, the employer's contribution has been raised to 14 per cent.
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 the NPS.
Liquidity
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 weddings, 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 per cent 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 will 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 tenure.
Exit Option
Tier I: On retirement at the age of 60, you have to mandatorily use 40 per cent of the corpus to buy an annuity. The remaining 60 per cent can be withdrawn and is now completely tax-free. Earlier, withdrawal of only 40 per cent of the corpus was tax-free.
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.
Tier II: In this voluntary account, you are free to withdraw your savings whenever you 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. Sixty 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
- SBI Pension Funds
- UTI Retirement Solutions
- Birla Sun Life Pension Management
Investment Options
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 permitted allocation towards equity is 75 per cent.
Auto-choice investment: Here, investment allocation is done based on the investor's age. In the 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 it reduces 1 per cent per year until it becomes 10 per cent by age 55. The exposure in government securities is 20 per cent till age 35, after which it increases gradually every year. Other options within auto-choice are 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.