Friday, 17 February 2017

What is National Pension Scheme and Some Retirement Planning Tips

Before we are going to know about some retirement tips we should know about NPS. The NPS stands for the national pension scheme. Every citizen who worked as an government employee will come under the national pension scheme in India. After the retirement of such employees the government institutions provide pension to them.

What is National Pension Scheme


It is a pension scheme which is the government of India initiative to provide a pension opportunity to every Indian. It was floated in January 2004 for new government recruits and this is compulsory for all the central government employees, along with some state government employees who joined after January 2004 and this was made open to all from May 2009. The basic Objective of this scheme is to inculcate a habit of saving specifically for retirement. Any resident from India from the age of 18 to 60 years can open an NPS account. This account is not compulsory for the employees who join before January 2004. But if they wish, they can also open an NPS account.

Let us look at the taxation part of the NPS, a maximum of 1.5 Lakh rupees of investments in NPS can be claimed for tax reductions under the overall limit of the section 80C and additional 50,000 rupees can be claimed for tax reductions under the section 80CCD1B. NPS has an EET status that is, an exemption on Investment and exemption on returns, but taxation on redemption. 40% of the couples that you get on retirement would be tax-free.

Types of NPS account

The first one is tier 1 account, which is a mandatory account for NPS subscribers. As well as the government employees are concerned and they have to contribute 10% of their basic salary and DA to NPS account and government makes an equal contribution. For other subscribers they have to open an account with minimum 500 rupees and they have to contribute 6000 rupees for each year. If you are a private sector employee you would be given an option to choose between NPS and EPF. If you go for NPS you would generally have to make a contribution of about 10% of basic and DA and an equal contribution would be made by a employer. Now in this contribution that your employer makes into your NPS account is not taxable and can be seen under the head 80CCD2. 

The second one is tier 2 account and this is the non mandatory account for NPS subscribers. This is the type of savings account from which you can make withdrawals anytime. No contributions would be made by the government or the employer in his account and no tax exemptions are available for investments into NPS through the tier 2 account. You would need at least 1000 rupees to open a tier 2 kind of account and then onwards minimum contribution amount is 250 rupees. Minimum account balance has to be rupees 2000 at the end of each financial year and the treatment of returns from tier 2 account is same as that of mutual funds.

You can invest into NPS through various fund managers. These fund managers invest into equity, corporate debt and government securities in varying proportions. When you invest into NPS you have three choices active choice, auto choice and default choice.

In active choice you can decide the proportion of your money getting invested in government securities, equities or corporate debt. But no more than 50% can be allocated to equities. On auto choice the proportion of investment in these options is based upon your age. Till the time 35 years old, 50% would be allocated to equity and 30% to corporate debt and then onwards equity portion would be reduced by 2% and corporate debt would be reduced by 1% each year. Because of which by the time you 55 years old, your equity allocation would be 10% as well as your corporate debt allocation would be 10%. In the default choice up to 50% of the money is allocated to government securities, up to 40% to corporate debt, up to 50% to equities and 5% is invested in money market instruments. Government employees have to follow the default option.

The Equity portion of NPS is invested in to Index stocks. Index stocks are the stocks which makeup the Nifty and the Sensex. There are seven fund managers through which you can invest into NPS. The seven fund managers are,

1. HDFC Pension Management Company
2. ICICI Prudential Life Insurance Company
3. Kotak Mahindra asset management company
4. LIC Pension Fund
5. Reliance Capital Asset Management Company
6. SBI Pension Fund
7. UTI Retirement Solutions

You can open a tier 1 and tier 2 account through through PSU Banks, Many private banks like ICICI, HDFC, Kotak etc. and through post offices. For opening an NPS account, you would need to fill up the required form and submit required documents along with your KYC documents. After your request is processed the central record keeping agency would send you a permanent retirement account number. This account number is unique and portable and would stay with you as long as the NPS account as. The NPS account has the minimum account opening fee and a fund management fee is also minimal which is 0.1%.


After being this scheme for 10 years, 25% of the contributions that you have made can be withdrawn for the reasons like, child's higher education or marriage. For construction of buying your first house, for critical illness or accidents or life threatening diseases to self spouse depending children and depending parents. You can make three withdrawals with a gap of five years. This gap is not applicable in case of critical illness, accidents or life threatening diseases.

Read: Few Points About Annuities

Exit Option

Let us discuss the exit options of NPS, if you are retiring before your age of 60 years, 80% of your corpus have to be utilized to buy an annuity and you can withdraw 20% of the amount by paying taxes according to your lax slab. If you retire at the age of 60 years, you can withdraw 60% of the amount by paying taxes on 20% of the corpus and remaining 40% has to be utilized to buy an annuity. Remember returns from an annuity are taxed according to your tax slab. On the death of the NPS account holder the entire corpus is given to the nominee.