7 things you need to know about NPS

25 Jan 2021|

2 min read |

by ICICI Securities Team

Most of us worry about retirement and having enough income in our old age. While some people save and invest enough, there are many who find it difficult to manage finances to ensure enough money post-retirement. The National Pension System (NPS) is a good option for those who want income after their working years are over.

NPS is a contribution-based pension scheme aimed at providing a regular income after retirement. It was launched for government employees in 2004 and later opened to everyone in 2009 through a few select banks, including ICICI Bank.

Contributions to NPS are handled by fund managers who follow guidelines set by the Pension Fund Regulatory and Development Authority (PFRDA) to invest in a diversified set of instruments comprising government bonds, T- bills, corporate debentures and shares.

The amount invested in NPS has a lock in period till the subscriber turns 60 or age defined by the employer. Some people find the long lock-in and compulsory annuity undesirable, but many point out that it is fundamentally a pension scheme, and hence withdrawal must be discouraged.

7 things you need to know about NPS

Types:
There are two types of NPS accounts – Tier I and Tier II. You must have a Tier I account to get a Tier II one. Tier I offers tax benefits, while Tier II is optional and taxed. While partial withdrawal is allowed under Tier I under some conditions, Tier II does not have such restrictions.
Withdrawal:
When the Tier I scheme matures, you can only withdraw 60 per cent of the corpus. The remaining 40 per cent must be reinvested in an annuity or pension plan from a PFRDA-empanelled insurance company. This does not apply if the corpus amount is under Rs.2 lakh, in which case you can withdraw the entire amount lump sum.
Partial withdrawal:
You can opt for partial withdrawal from an NPS Tier I account after completing 10 years of subscription. The partial withdrawal must not be over 25 per cent of your contribution.
Investment modes:
There are two modes -- Active and Auto. Under Active mode, you can pick and choose your own asset mix of equity, corporate and government bonds. If you opt for Auto, the fund managers choose for you, under a scheme which gradually reduces equity investments as you age to reduce risk and volatility.
Premature exit:
If you opt for premature exit for whatever reason, at least 80 per cent of the corpus must be used to buy an annuity. You can lump sum withdraw 100 per cent of the corpus only if it is Rs. 1 lakh or less.
Death of subscriber:
In case the subscriber dies, the entire amount in the account would go to the nominee or legal heir. So it’s important to have a nominee in all long-term plans.
Tax benefits:
The NPS offers several benefits, including deductions of up to Rs. 2 lakh per annum from taxable income – Rs. 1.5 lakh under Section 80CCD(1) and another Rs. 50,000 under Section 80CCD(1B). This means that if your income is Rs. 10 lakh, you will be taxed only on Rs. 8 lakh. NPS therefore should be seen as option for both immediate tax benefits as well as a corpus for retirement.

Click here to invest in NPS through ICICIdirect.

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