by Namrata Singh, CFP & Chaitali Shah, MA (Economics)

National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme. NPS was introduced on 1st January, 2004 with an objective to provide retirement income to all citizens. The scheme is government backed and regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

The scheme is available to Indian Citizens as well as Non Resident Indians

There are two types of NPS accounts :

Tier 1 (Pension Account)

This the Primary account and Mandatory for Participating employers

All the aforementioned tax benefits pertain to Tier 1 account

Tier 2 (Investment Account)

This is a Voluntary Account. A Tier 1 account is mandatory to open a Tier 2 Account.

There are no Tax Benefits Available

The following asset classes are available for investments:

Asset Allocation Options

Auto Allocation: Passive strategy where the investor does not have any choice. The equity allocation reduces with the increase of age of the investor. Asset allocation can be chosen as per risk appetite

Aggressive <= 75% Equity

Moderate <=50% Equity

Conservative <=25% Equity

Active Allocation: This is an active strategy. An investor can choose a maximum allocation of 75% into equity till age 50 under this option.

One can shift from auto allocation to active allocation up to 2 times in a year. The shift will not have any capital gain implication.

Currently there are 7 Pension Fund Managers in India. The subscriber has an option to change the Pension Fund Manager once in a year

Recent Performance of Tier 1 – Equity Fund is as under :

Source: https://www.npstrust.org.in/return-of-nps-scheme

Exit Options

Available Before 60

The subscriber should have contributed for minimum period of 10 years

Only 20% of the accumulated corpus can be withdrawn as lump sum tax free. Annuity to be taken for the remaining 80% corpus

In case the accumulated corpus is up to Rs. 2.5 lacs, 100 % corpus can be withdrawn tax free

Available After 60

An investor can withdraw up to 60% of the accumulated corpus as lump sum tax free. Annuity to be taken for the balance 40%

In case the accumulated corpus is upto Rs.5 lacs, 100% of the corpus can be withdrawn tax free

The amount that is used to purchase the annuity is tax free, however the Annuity income is not tax free

Annuity Post Retirement

The investor can choose the various options available as mentioned below. No GST applicable on Annuity Purchase under NPS

A recent PGIM Retirement Readiness Survey pointed out that only 52 % of their respondents knew how much they needed for retirement. And 69 % of them did not have a retirement plan in place.

People are realizing the importance of retirement planning in our country. NPS can help people plan for their retirement from a very early age. A very low expense ratio, attractive tax benefits and flexible investment options make NPS an ideal retirement solution.

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​​Namrata Singh is a Certified Financial Planner with more than 14 years of experience in banking and wealth management. ([email protected])

Chaitali Shah, MCom & MA (Economics) was a Financial Economics – Faculty at Wilson College, Mumbai ([email protected])

(Please note all views are personal)