Retirement Solution: Know All About NPS

Written on Sunday, June 11, 2017
By Mitali Sharma

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If you are looking for a Government-backed retirement solution that also offers tax benefits, then NPS is ideal for you. It qualifies for tax deduction under section 80 C, 80CCD(1B), 80CCD2 of Income Tax Act of 1961. The minimum yearly contribution to NPS is Rs 6,000. This either can be paid in one go or in installments of at least Rs 500.

 
How National Pension System (NPS) Works?

It is a Government approved pension product for Indian citizens in the 18-60 age group. It is regulated by Pension Fund Regulatory and Development Authority (PFRDA). As a subscriber of this scheme, you are required to make regular monthly/annual investments towards your account. On attaining retirement, a portion ( 60% or 20%, depending on age of exit) from your retirement corpus can be withdrawn as a lumpsum amount and from the remaining portion, you are obliged to buy an annuity from a PFRDA appointed Pension Fund Mangers, who will be managing your fund and giving you a monthly payment in form of your pension.

 

There are two types of accounts that NPS offers:
 
1. Tier-I Account (Pension Account) 
 
However, if you wish to withdraw your NPS corpus before retirement (Age-60), then only 20% of the corpus amount can be withdrawn and the remaining 80% necessarily has to be utilized for buying an annuity. You can use 100% of your accumulated pension corpus to buy annuity plan.
 
It's the basic account and has limitations on withdrawal: Here, if you hold your NPS account till the age of 60, then you can withdraw 60% of your maturity corpus and the remaining 40% necessarily has to be used for the purchasing of an annuity from a life insurer.
 
2. Tier-II Account (Investment Account)
 
Tier -II is an add-on account for voluntary savings. Those who already have a Tier-1 account, they can only open the Tier-2 account. In Tier-II account, you are free to withdraw your savings at any point of time without any existing load.
 
Pension Fund Managers
 

NPS gives you the flexibility to choose any one of the following Pension Fund Managers, appointed by PFRDA.

. LIC Pension Fund

. SBI Pension Fund

. ICICI Prudential Pension

. HDFC Pension Fund

. UTI Retirement Solutions

. Reliance Capital Pension

. Kotak Pension Fund

 
Assest Classes in NPS 
 
After choosing your fund manager, NPS also gives you the flexibility to design your own investment portfolio. As per your risk appetite, you can allocate your annuity funds among the following three asset classes:
 
. E (Equity)-- High Return- High Risk
 
. C(Corporate Debt)--Medium Return-Medium risk
 
. G (Government Securities)-- Low return-low risk
 
* Exposure to equity is capped at 50% of assets.
 
If designing your own portfolio seems to be time-consuming for you, then you can opt for dynamic allocation of your portfolio. Here, your asset will be invested in all three asset classes at a percentage pre-defined as per the age. The chart is given below:
 

 

Tax Benefits Under NPS

1. Under section 80 C of Income tax, deduction on NPS can be claimed for investments up to Rs.1,50,000.

2. Under section 80CCD(1B) of Income tax, additional deduction over and above the limit of section 80 C can be claimed subject to overall ceiling of Rs. 50,000.

3. Under Section 80CCD(2) of Income tax, the employer's NPS contribution(towards the employee) up to 10% of salary, without any monetary limit is also deductible from taxable income in addition to mentioned earlier benefits.

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