Am I eligible for investing in NPS?

Introduction

Launched by the Government of India in 2004, the National Pension Scheme (NPS) helps you accumulate funds for your retirement. Initially, the scheme was only available for salaried employees. However, later the initiative was extended to all resident and non-resident Indians, provided they meet the eligibility criteria. The NPS invests your contributions in different market-linked instruments such as equities and debts, allowing you to create a regular income during retirement and improve social security.

If you wish to invest in NPS, read this quick guide to understand the scheme in detail and check your NPS eligibility:

What is NPS? How does NPS work?

NPS is a voluntary, defined contribution, a retirement savings plan that helps you create a retirement corpus and get regular income during the non-working years of your life. 

In NPS, your savings are pooled together in a pension fund and invested in a diversified portfolio of securities, including government bonds, shares, corporate debentures and alternative assets (such as real estate funds, etc.). These pension funds are regulated by the Pension Fund Regulatory Development Authority of India (PFRDA). 

Your savings grow and accumulate over the years according to the performance of the underlying securities. However, NPS returns are tax-free. 

How can you allocate your money in NPS?

You can actively manage your investments or opt for auto management.

In the former, you choose your desirable securities and percentage allocation. You cannot invest more than 5% of your corpus in alternative assets and not above 75% in equity; this limit decreases as you approach your retirement age. 

In the latter (auto management), the fund that you choose allocates your assets (up to 75% in equity). The portfolio is automatically rebalanced to include more bonds and less equity as you near your retirement age. You can change your asset distribution twice in a financial year. However, you do not have the option to invest in alternative assets.

What are the types of NPS accounts?

You will find two variants of NPS accounts:

1. All Citizens Model (Individual NPS account): In this NPS type, you are the only contributor and have the authority to make all scheme-related selections, such as asset allocation, annuity service provider, etc. Any citizen of India and NRIs (non-resident Indians) between 18 and 65 years can open an individual NPS account to get tax benefits and create regular pension income during retirement. 

This type is further classified as Tier I and Tier II. 

• Tier I: This is a permanent retirement account, and you cannot withdraw the savings in this account. Upon maturity (60 years of age), 60% of the corpus is eligible for tax-free withdrawal, 40% is invested in an annuity to create a regular retirement income, and 20% can be withdrawn after paying taxes or invest further in an annuity. This account is eligible for tax deduction under Section 80C up to Rs. 1.5 lakhs per annum. You can also get an additional tax exemption of up to Rs. 50,000 per annum under Section 80CCD (1B). 
• Tier II: This is a voluntary savings account, which is available only if you have a Tier I account. You can invest and withdraw as per your choice. You can get tax deductions in this account, provided you do not withdraw your funds until the expiry of the lock-in period of three years. 

1. Corporate Model: Employees of a registered corporate entity can contribute to NPS with a fixed contribution from the employer. Employee contribution is eligible for tax exemption under Section 80C and 80CCD (1B). 

What are the NPS eligibility norms?

Any resident or non-resident of India (NRI) between 18 and 65 years can open an NPS account. In the case of an NRI, the account is subject to regulations prescribed by the Reserve Bank of India (RBI) and the Foreign Exchange Management Act (FEMA). 

You have to comply with all KYC (Know Your Customer) norms and require the following documents to open an NPS account:

• Proof of identity such as Driving License, PAN Card, Aadhar Card, etc.
• Proof of address such as Aadhar Card, Driving License, Passport
• Proof of age
• Cancelled cheque (if required)

If you meet the eligibility requirements, you can open your NPS account online at enps.nsdl.com or enps.kfintech.com. For offline mode, you can go to your nearest Point of Presence (POP) entity appointed by PFRDA. For corporate NPS accounts, you can contact your Human Resource (HR) department and complete the required formalities. 

Conclusion

In all, the investment flexibility, attractive returns coupled with government security and tax savings make NPS a sound investment choice. If you meet the NPS eligibility, read all scheme related documents carefully and choose an account opening mode per your convenience. 

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  PFRDA registration numbers:  POP no -05092018. We are distributors of National Pension Scheme. Please note, National Pension Scheme related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.