All you wanted to know about the NPS

The National Pension Scheme or the NPS is a pension scheme launched by the Government of India offering a stable income to all Indian citizens post retirement. NPS is open to all citizens between the age of 18 and 60 but the applicant has to comply with the KYC norms to join the scheme.

After joining the scheme, the subscriber is issued a card with a unique 12-digit Permanent Retirement Account Number (PRAN), along with two accounts: Tier-I account and Tier-II account The Tier-I account is mandatory and the subscriber cannot withdraw money from this account till retirement. The Tier-II account is voluntary and the subscriber is allowed to withdraw any amount from this account anytime.

The subscriber can contribute regularly to the pension account during his/her working life. Upon retirement, the subscriber can withdraw a part of the pension amount in lump sum and utilise the balance corpus for buying annuity in order to secure a regular income post retirement. The subscriber to the NPS has to contribute a minimum of Rs 6,000 in his/her Tier-I account during a financial year. Failure to do so will lead to freezing of the account, which can be unfrozen on payment of a penalty of Rs 100.

The NPS funds are managed by PFRDA-registered pension fund managers. Presently, 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.

The NPS offers two investment choices to the subscriber: Active Choice, where the investor decides how the money should be invested in different asset classes. This choice offers three investment options: Asset Class E (invests 50% in equities), Asset Class C (invests in fixed income instruments, except government securities), and Asset Class G (invests only in government securities). The investor can choose any of these options or a combination of these.

The other investment choice available is Auto Choice, which is a default option which automatically invests money depending on the age of the subscriber. The subscriber can change his/her investment choice once in a financial year for both Tier-I and Tier-II accounts. He/she can also change the scheme as well as the fund manager.

The contribution to NPS is eligible for tax deduction under Section 80CCD(1) withint the overall ceiling of Rs 1.50 lakh available under Section 80C and Section 80CCE. Subscribers can also claim additional deduction of up to Rs 50,000 under Section 80CCD(1B).

After 60 years of age, the subscriber can withdraw 60% of the corpus as lump-sum amount, out of which 40% will be tax-free and 20% will be taxable as per the tax slab applicable. The subscriber has to utilise the balance 40% of the corpus to buy annuity income from the PFRDA-listed insurance company. Of course, one can defer withdrawing the lump-sum amount till the age of 70. However, if the subscriber dies before the age of 60, the entire accumulated amount will be paid to the heir/nominee of the subscriber.