Nps Investment Guide: A Secure Retirement Plan

The National Pension System (NPS) is a government-backed retirement savings initiative in India. It is a voluntary scheme for all citizens of India aged between 18 and 70. The NPS provides tax benefits, flexible investment options, and the ability to choose different investment options managed by professional fund managers. It also offers market-linked returns on investments.

How to open an NPS account online and offline

The National Pension System (NPS) is a government-backed retirement savings initiative in India. It is open to all Indian citizens, including NRIs, between the ages of 18 and 70. The NPS is a voluntary scheme aimed at providing financial security during retirement.

Opening an NPS Account Online:

To open an NPS account online, you can follow these steps:

• Visit the eNPS website (https://enps.nsdl.com/eNPS/NationalPensionSystem.html) or the eNPS portal of the CRA of your choice.
• Link your mobile number, Aadhaar, and Permanent Account Number (PAN) to the NPS account.
• Verify your mobile number with an OTP.
• Complete the registration and receive your PRAN (Permanent Retirement Account Number), which can be used to log in to your NPS account.
• Make an initial deposit of at least Rs.500 (excluding tax). There is also a one-time registration fee.

Opening an NPS Account Offline:

To open an NPS account offline, you can follow these steps:

• Visit your nearest Point of Presence - Service Provider (PoP-SP), which can be certain banks or post offices.
• Obtain an NPS subscriber form and fill it out.
• Submit the form along with photocopies of your KYC documents such as Aadhaar card, PAN card, passport, etc., unless you are an existing customer of the bank.
• Make the initial deposit of at least Rs.500 (excluding tax) and the one-time registration fee.
• You will receive your PRAN and a welcome kit containing the password to operate your account online.

Other Important Information:

• The NPS has two types of accounts: Tier 1, which is mandatory and offers tax benefits, and Tier 2, which is optional and does not have tax benefits.
• NPS accounts offer flexibility in choosing investment options and allow individuals to operate their accounts from anywhere in the country.
• NPS withdrawals are subject to certain rules and regulations, with different guidelines for Tier 1 and Tier 2 accounts.
• The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

The two types of NPS accounts: Tier I and Tier II

The National Pension System (NPS) offers two main types of accounts: Tier I and Tier II. Here's what you need to know about each type:

Tier I NPS Account:

Tier I is the primary pension account for individuals looking to save for their retirement. It is mandatory for certain groups, such as Central Government employees, but voluntary for others. Tier I accounts offer tax benefits and provide a structured approach to retirement planning. Here are some key features of Tier I accounts:

• Eligibility: Any Indian citizen (resident, non-resident, or Overseas Citizen of India) between 18 and 70 years old can open a Tier I account.
• Minimum Contribution: The minimum contribution requirement is flexible, ranging from ₹500 to ₹1,000 per year, with some sources mentioning a minimum contribution amount of ₹250.
• Lock-in Period: Tier I accounts have a lock-in period until the investor turns 60 years old, allowing for long-term retirement savings.
• Withdrawals: Withdrawals are restricted until the age of 60. At maturity, individuals can withdraw a lump sum of up to 60% of the total corpus, while the remaining 40% must be used to purchase an annuity plan.
• Tax Benefits: Contributions to Tier I accounts are eligible for tax deductions under Section 80C and Section 80CCD(1B) of the Income Tax Act.
• Investment Options: Investors can choose from various investment options, including equity, corporate bonds, and government securities, to build their retirement savings.

Tier II NPS Account:

Tier II is a voluntary add-on account that offers flexibility in savings and withdrawals. It functions more like a regular savings or investment account. Here are the key features of Tier II accounts:

• Eligibility: To open a Tier II account, individuals must already have an active Tier I account.
• Minimum Contribution: The minimum contribution amount is ₹1,000 initially, and subsequent contributions can be as low as ₹250 per transaction.
• Lock-in Period: Tier II accounts do not have a mandatory lock-in period, allowing investors to withdraw funds at any time.
• Withdrawals: There are no restrictions on withdrawals, providing easy access to funds.
• Tax Benefits: Contributions to Tier II accounts do not qualify for tax deductions or additional tax benefits.
• Investment Options: Tier II accounts offer similar investment options to Tier I, including equity, corporate bonds, and government securities.

Both Tier I and Tier II accounts have similar charges, fund managers, and fund schemes. The main difference lies in the withdrawal rules and tax benefits offered by each type of account. Tier I accounts are ideal for long-term retirement savings, while Tier II accounts provide flexibility and easy access to funds.

The benefits of investing in NPS

The National Pension System (NPS) in India is a government-backed, voluntary, and long-term investment plan for retirement. It is a social security initiative by the Central Government that offers a structured and disciplined approach to retirement planning. Here are some benefits of investing in NPS:

Tax Benefits:

The NPS provides tax advantages under Section 80C and Section 80CCD(1B) of the Income Tax Act. By investing in NPS, individuals can avail a deduction of up to ₹1.5 lakh under Section 80C and an extra deduction of up to ₹50,000 under Section 80CCD(1B). NPS also offers tax benefits on contributions, gains, and maturity, making it a tax-efficient option.

Cost-Effective:

The NPS is known for its low fees and charges, making it attractive for long-term investors. The Pension Fund Regulatory and Development Authority (PFRDA) regulates the NPS, ensuring transparency and security for investors.

Flexibility in Investment Options:

The NPS offers two types of accounts: Tier I and Tier II. While Tier I is the primary pension account with certain withdrawal restrictions, Tier II is a voluntary, flexible investment account. Individuals can choose their preferred investment option or opt for the Auto choice, which automatically adjusts the asset allocation based on age.

Professional Management:

The NPS is professionally managed by authorised fund managers, providing a sense of security for investors. The PFRDA oversees all aspects of the NPS, ensuring stringent regulations are met.

Regular Pension After Retirement:

The NPS ensures a steady post-retirement income through annuities. On maturity, individuals receive 60% of the corpus as a lump sum, while the remaining 40% is used to purchase annuities, providing a regular pension.

Flexibility in Investing:

The NPS scheme offers flexibility in terms of investment timing and amount. Individuals can start with as little as ₹1,000 per year and invest whenever they want, making it suitable for self-employed individuals with variable income.

Who is eligible to invest in NPS

The National Pension System (NPS) is open to all Indian citizens, including Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs), aged between 18 and 70. The scheme is also available to subscribers of the Atal Pension Yojana (APY) and the service discharge benefit scheme (SDBS) for Gramin Dak Sevaks (GDS).

The NPS is a voluntary scheme, and individuals can choose how much to invest in their NPS account. However, to open a Tier I account, which is the primary pension account, a minimum contribution of INR 500 is required, and a minimum of INR 6,000 must be contributed annually.

To be eligible for an NPS account, individuals must comply with the Know Your Customer (KYC) norms detailed in the application form and be legally competent to execute a contract as per the Indian Contract Act.

Overseas Citizen of India (OCI), Persons of Indian Origin (PIOs), and Hindu Undivided Families (HUFs) are not eligible to subscribe to NPS. NPS accounts cannot be opened on behalf of a third person as they are individual pension accounts.

How to invest in NPS: Tier 1 and Tier 2

The National Pension System (NPS) is a government-backed retirement savings initiative. Indian citizens, including NRIs, can invest in NPS to build a substantial corpus for retirement. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Tier 1 NPS Account

Tier 1 is the primary pension account and is mandatory for all subscribers to the NPS scheme. It is designed to provide a retirement corpus and has certain withdrawal restrictions. It mandates a minimum contribution of Rs. 1,000 per year and a lock-in period until the subscriber turns 60. The funds invested in Tier 1 NPS are eligible for tax deductions under Section 80C of the Income Tax Act.

Tier 2 NPS Account

Tier 2 is an optional, voluntary investment account that offers flexibility in terms of withdrawals. It allows subscribers to invest and withdraw funds as per their requirements without any lock-in period. However, contributions to the Tier 2 NPS account do not qualify for additional tax benefits.

Eligibility Criteria

To be eligible to open an NPS Tier 2 account, an individual must fulfil the following criteria:

• Be a resident Indian aged between 18 and 60 years.
• Have an active Tier 1 NPS account and a PRAN (Permanent Retirement Account Number) allotted.
• Make a minimum deposit of Rs. 1,000 to open the Tier 2 account, and subsequently maintain a minimum deposit of Rs. 250 per financial year to keep the account active.

Opening an NPS Account

NPS accounts can be opened both online and offline. To open an account offline, individuals must find a Point of Presence (PoP) registered with the PFRDA, usually a bank, and submit a subscriber form along with KYC documents. The PoP will then provide the individual with a PRAN.

To open an account online, individuals can visit the eNPS website and link their account to their PAN, Aadhaar, and mobile number. They will then receive a PRAN, which can be used for NPS login.

Investment Options

When investing in the NPS, individuals have the option to choose how their money is invested across different asset classes: equity, corporate debt, government securities, and alternative investment funds. They can either choose the 'auto choice' option, where asset allocation is done automatically based on age and risk profile, or the 'active choice' option, where they can decide the proportion of each asset class in their portfolio.

Tax Implications

While Tier 1 NPS contributions are eligible for tax deductions, Tier 2 contributions are not tax-exempted for non-government employees. However, central government employees are eligible for a deduction under Section 80C for contributions made to the Tier 2 account after a lock-in period of 3 years.

Frequently asked questions