NPS(National Pension Scheme)

 How many are aware of the scheme by the government known as  National Pension Scheme(NPS)? Well I am pretty sure many might be. But, what is it and how does it work? Do you know? Well here I will be explaining you about it.

National Pension Scheme:-

National Pension Scheme (NPS) India is a voluntary and long-term investment plan for retirement, where your investment is diversified automatically to gain good returns into places like the equity, corporate bonds, government securities and other alternatives that could balance your returns with minimized risk. It is regulated by the Pension Fund Regulatory and Development authority(PFRDA).  This scheme is a social security initiative by the Central Government. This pension program is open to employees from the public, private and even the unorganized sectors.

These investments can be taken out after retirement (age 60). After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement. 

Initially, this was only for the government employees. However, later it was made open for all public.

Returns and benefits:-

Since a portion of every investment in this scheme goes to the equities the return of this investment could defer from person to person, the type and the stocks chosen. However this scheme is known to have been consistently giving a return of 9% or above at approx which is better than a FD or any savings account.

Since this scheme diversifies your investment on its own by managing your risk in a limited manner it is always a good place to invest.

Currently, there is a cap in the range of 75% to 50% on equity exposure for the National Pension Scheme. For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age.

By this way this scheme not only diversifies your portfolio and manages the risk but also understands and acts upon your capabilities of bearing losses and risk taking capability with your growing age.

There is also a deduction of up to Rs.1.5 lakh to be claimed for NPS – for your contribution as well as for the contribution of the employer. – 80CCD(1) covers the self-contribution, which is a part of Section 80C. The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the said limit. For the self-employed taxpayer, this limit is 20% of the gross income.

Structure of the NPS scheme working:-

 Here, once the subscriber applies for the NPS scheme the request goes to the central record keeping agency which verifies their application and forwards the request to the trustee bank which is the axis bank that is given the responsibility for this work. The trustee bank also approves and sanctions the pension fund which is handled by custodian. The custodian and the custodian also report to the NPS trust while the NPS trust finally reports to the regulatory body of NPS accounts the PRFDA. Every NPS account is then provided with a fund manager which interacts with the customer and manages the NPS account of the applicant.

Option to change the Scheme or Fund Manager:-

With NPS, you have the provision to change the pension scheme or the fund manager if you are not happy with their performance. This option is available for both tiers I and II accounts.

Types of account:-

The account of NPS could be of 2 types. Tier 1 is a is mandatory retirement account, whereas Tier II is a voluntary saving Account associated with your PRAN.

 What is active/auto choice in NPS?

Active choice:

Unlike traditional investment products, NPS offers you with the flexibility to design your own portfolio. Depending on your risk appetite, you can design your portfolio by allocating Funds amongst available four asset classes. This is called Active Choice. Following are the four asset classes are available under Active choice:

1. Equity or E
2. Corporate Debt or C
3. Government Securities or G
4. Alternative Investment Funds or AIF

Auto Choice:

At times designing your portfolio can be a little delicate and time consuming. NPS gives you the flexibility to opt for a dynamic and automatic allocation of your portfolio in case you do not want to exercise an Active choice. This option is called the Auto choice.

In Auto choice, your money will be invested in asset classes - E, C and G - in defined proportions based on your age. As individual’s age increases, exposure to Equity and Corporate Debt is gradually reduced and that in Government Securities is increased. Depending upon the risk appetite of subscriber, there are three different options available within Auto Choice-Aggressive, Moderate and Conservative.

1. Aggressive (LC-75) – Maximum Equity exposure is 75% up to the age of 35
2. Moderate (LC-50) - Maximum Equity exposure is 50% up to the age of 35
3. Conservative (LC - 25) – Maximum Equity exposure is 25% up to the age of 35

Withdrawal rules after 60:- 

Contrary to common belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm. The remaining 60% is tax-free now. The latest update from the government says that the entire NPS withdrawal corpus is exempt from tax.

Early Withdrawal and Exit rules:-

As a pension scheme, it is important for you to continue investing until the age of 60. However, if you have been investing for at least three years, you may withdraw up to 25% for certain purposes.

These include children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others. You can make a withdrawal up to three times (with a gap of five years) in the entire tenure.

These restrictions are only imposed on tier I accounts and not on tier II accounts.

Conclusion:-

After knowing the foolowing things it almost seems truly inevitable to deny to such a great scheme by the government which has been taken as an investment intiative for the majority middle class people of India.