What is NPS?
National Pension System (NPS), a government-sponsored pension scheme, is a market-linked, defined-contribution product where you can invest regularly in the funds of your choice. Since it’s a market-linked product, hence returns are based on the performance of the fund that you choose.
The scheme has been launched way back in 2004 for government employees, but opened to all citizens in 2009. NPS offers various funds and asset classes for the subscriber to choose from depending on her risk appetite and needs. The scheme offers you the option to invest in four asset classes namely- equities, government securities, corporate debt and Alternative Investment Funds or AIFs. However, you have to first opt for the pension fund manager and then chose the investment option. You can also choose from- Active option or Auto option to invest in the above mentioned asset classes. NPS allows to change the pension fund manager subject to certain limits. A subscriber up to 50 years of age can invest only up to 75% of his portfolio in equities which is Asset class E.
What are types of NPS account?
The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. The Tier-I account is mandatory for everyone who opts for NPS scheme. The Central government employees have to contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option.
Who should invest in the scheme?
Of the above mentioned schemes, NPS tier-II is a voluntary account where subscribers can invest as per their convenience. It is one of the many retirement plans available in the market that can help you aim for a retirement corpus or prepare for retirement early especially if you have a low-risk appetite. Those in a job without a regular pension (income) can consider opting for the scheme at it helps you accumulate post-retirement savings. In fact, those looking to make the most of the 80C deductions can also consider this scheme.
Having an NPS tier-II account is optional while the tier-1 account or the retirement account is mandatory. Under the rules, central government employees will have to contribute a minimum of ₹1,000 to activate the tier-II account while an investment of ₹250 is required in the subsequent years.
What are tax benefits in NPS?
It is important to note that contribution towards NPS tier 1 account offers an exclusive deduction of ₹50,000 under Section 80CCD (1B). This is in addition to the ₹ 1.5 lakh allowed under Section 80CCD (1) for investment towards NPS. However, the total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year.
How to register for NPS account?
- Firstly log on to the NPS Trust website: https://www.npstrust.org.in/, and click on ‘I want to open an NPS account’ under the service tab.
• After you click on that you will be have to select your choice of CRA (Central Record Keeping Agency) between NSDL or KARVY.
• You can also see the charges under each CRA: PRA opening charges, annual PRA Maintenance cost per account, and a charge per transaction.
• On clicking on either of the option, you will be directed to their respective eNPS website.
• You can click on the NPS tab and proceed with opening the account – a popup page will open, click on registration option/open new NPS account online option.
• Then you will have to enter your PAN, choose the type of account you want to open, from the option Tier I and Tier II, or Tier I only account. Note that in the Tier, I account, contributions are eligible for tax deduction benefit of up to Rs. 50,000 U/S 80CCD (1B), over and above Rs 1.5 lakh u/s 80C. With the other option, one can withdraw the entire accrued corpus any time and no tax benefits are available in this account.
• From here you will be taken to the registration form wherein you have to fill in your personal details, contact details, bank details.
• Remember, the next step is important as you have to choose an investment mode, from auto mode, and active mode.
• If you select the active management option, you will have to choose the investment mix by yourself and specify how you want to spread your corpus across fund classes.
• You need to type your nomination details and upload all the necessary documents along with your photo and proceed to the payment details. The minimum amount is set at Rs 500 for Tier I and Rs 1,000 for Tier II accounts.
• Once it is done, click on submit to generate the acknowledgment number.
• After this, the acknowledge ID will be generated and your registration details will be submitted.
• After the payment is processed, your PRAN number (Permanent Retirement Account Number) will be generated.
• After PRAN is generated, you can select the ‘eSign’ option in the eSign/Print and Courier page, following which the process gets completed.