Know about an ideal retirement scheme on this NPS Diwas

In September 2021, The Pension Fund Regulatory and Development Authority (PFRDA) announced that 1 October of every year would be celebrated as 'National Pension Scheme (NPS) Diwas' to promote retirement planning among the citizens of India and enjoy financial independence post-retirement.

The PFRDA is promoting this campaign on its social media platforms. NPS is an excellent retirement cum pension scheme launched in 2004 by PFRDA. NPS is an ideal retirement scheme that encourages one to periodically set aside a nominal sum to secure one's retired life.

The Central government started the scheme to stop defined benefit pensions for all its employees who joined the government services after 1 January 2004. While NPS was initially introduced for government employees' benefit only, it allowed all Indian citizens in 2009.

However, the NPS has only 12.7 lakh, voluntary subscribers. Opening an NPS account has been involuntary for all government sector recruits since 1 January 2004. NPS is a pension cum investment scheme launched by the Indian government to provide retirement security to Indian citizens.

NPS offers an attractive long-term saving avenue to plan retirement through a regulated market-based return effectively. PFRDA has established the National Pension System Trust, the registered custodian of all NPS assets.

PFRDA is the regulatory body under the Ministry of Finance, for the overall supervision and regulation of pensions in India. It regulates NPS, subscribed by employees of Government of India, State governments and by employees of private institutions/ organisations and unorganised sectors.

Who are eligible?

All Indian citizens, including NRIs between 18 and 65 years, can open an Individual Pension Account under NPS. They can open the NPS account in only tier I or both tier I & tier II.

Income tax benefits

NPS is a retirement benefit scheme and one of the best investment products that come in handy for reducing income tax liability. If you opt for the new tax regime in the FY 2020-21, then tax benefit under various sections under 80C towards contributions to the NPS fund is unavailable. Until 2018 the NPS was taxed at maturity (Exempt Exempt Taxable).

The Budget 2018, to make NPS lucrative, accorded NPS the Exempt Exempt Exempt (EEE) status. For this reason, the NPS is not taxed at maturity. Moreover, in 2015 to encourage investment in NPS, Section 80CCD(1B) of the Income-tax Act allowed an additional deduction of Rs 50,000 over and above the Rs 1.5 lakh available under Section 80C. The additional tax deduction under section 80 CCD (1b) added much to the scheme's attractiveness to the salaried taxpayers.

Methods of opening an NPS account

Any Indian citizen can open an NPS account through eNPS using Aadhaar offline e-KYC. The individual intending to open an NPS account must have an Aadhaar-registered mobile number. The person must upload a scanned copy of the signature in jpeg/jpg/png format, with a file size between 4KB - 5MB. Another option is to print and post/courier the registration form to CRA's office.

The individual will be routed to a payment gateway for making the payment towards your NPS account from Internet banking or credit/debit cards. The individual will be allotted a PRAN; the permanent retirement account number is commonly referred to as PRAN. All contributions will be credited to the particular PRAN on a T+2 basis.

Another option is registration using PAN (KYC verification by bank). In this case, the individual's permanent account number (PAN) will be linked, and the respective bank will verify KYC. The individual has to visit the nearest bank or point of presence-service providers (POP-SP). Duly filled in application and photograph, documents, and signature must be sent within 30 days from allotment of PRAN to CRA.

Return on NPS

The essential attribute of the NPS is that NPS does not provide fixed returns. The NPS account return varies as the contributor must opt for their preferred fund house.

On the flip side, the stock market turmoil may take its toll on the NPS equity returns. The investors can choose seven fund houses: SBI Pension Fund, UTI Retirement Solutions Pension Fund, DSP Blackrock Pension Fund, ICICI Prudential Pension Fund, Reliance Capital Pension Fund, LIC Pension Fund, HDFC Pension Management Company, and Kotak Mahindra Pension Fund.

Therefore, the returns vary across the fund houses. The investors can choose seven fund houses from Birla Sunlife Pension Management. HDFC Pension Management Co, ICICI Prudential Pension Fund Management Co, Kotak Mahindra Pension Fund, LIC Pension Fund, SBI Pension Funds, and UTI Retirement Solutions.

If the contributor to NPS does not choose the fund house, then the SBI Pension Fund will be selected by default. LIC Pension Fund, UTI Retirement Solutions, and SBI Pension Funds exclusively manage NPS for government employees.

NPS Lock-in and premature withdrawals

The contributions investors make in an NPS account are locked in until 60. The contributor to the tier 1 account must invest at least Rs 1,000 in their NPS account. One can open a tier-II account with Rs 1,000. One single contribution in a financial year is mandatory. The minimum contribution is Rs 250. Transfer of funds from a tier II to a tier I account is allowed.

The contributor can do so after the third year of opening the NPS account. The withdrawal amount cannot exceed 25 percent of the subscriber's total contribution value. Premature withdrawals will be allowed for children's education, marriage, treatment of critical illnesses, and purchase of land and residential property. The withdrawal requests of NPS subscribers will be executed in T+2 working/settlement days.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)