National Pension System (NPS) in 10 points

1. NPS is a pension scheme by Government of India for all citizens for their post retirement financial income. Government employees will now get pension under this scheme. Any individual citizen can also register for this pension scheme.

2. Any citizen of India from age group of 18 to 65 can join this scheme and can contribute till the age of 70. From the age of 60 to 70 you can declare your retirement and get monthly pension income.

3. The goal of NPS is to create corpus till the age of retirement (minimum 60) and use the same corpus for his/her pension. One has to contribute a minimum of Rs. 1000 annually for Tier-1 account and Rs. 250 for Tier-2 account.

4. A Tier-1 account is a mandatory retirement account and Tier-2 is a optional account for savings. One can withdraw money anytime from Tier-2 account but cannot withdraw from Tier-1 account for at least 10 years. There are no tax benefits for Tier-2 account.

5. In NPS, money is handled by Pension Fund Managers (PFM). This money is invested into 4 asset classes i.e  Equity (E),  Corporate Debt (C),  Government Securities (G), Alternative Investment (A). Aggressive investors can give more weightage to Equity (>75%) and Conservative investors should give more weightage to C & G. Past returns for these can be found here.

6. One has to choose a PFM from the following list. One can change the fund manager during NPS. 

• LIC Pension Fund
• SBI Pension Fund Ltd.
• HDFC Pension Management Company Ltd.
• ICICI Prudential Pension Funds Management Company Ltd.
• Kotak Mahindra Pension Fund Ltd.
• UTI Retirement Solutions Ltd.
• Aditya Birla Sun Life Pension Management Ltd.

7. An Individual can get exemption of Tax on Rs. 1.5 lakhs under sec 80CCD and a additional tax exemption of Rs. 50,000 under sec 80CCD (1B). As an employee of a company, you can get additional benefit of tax exempt on 10% of the salary if invested in NPS under sec 80CCD(2).  

After retirement, the corpus invested in annuity will be fully tax exempted. Though regular pension will be taxed according to tax bracket. Also, upto 40% of corpus withdrawn in lump sum will be fully tax exempted i.e If you have 1 crore corpus at age 60, you can withdraw 40 lakhs and put 60 lakhs in annuity for full tax exemption at retirement.

8. Normally, one can withdraw/exit from NPS only after retirement (age >=60) but there are special conditions to exit/withdraw some amount from NPS. These are :-

• Premature exit :- Would mandate to put 80% in annuity on retirement before 60 and rest can be withdrawn as lump sum. Only if the amount is below 1 lakhs, one can withdraw 100% amount. These can be done only after completing 10 years in NPS.
• Death :- The entire corpus will be returned to the nominee or heir.
• Partial Withdrawal :- It is allowed if money is required for following reasons : higher education of children, marriage of children, purchase of house, health issues. Withdrawal can be done only after completing 3 years in NPS and only 25% of amount can be withdrawn. Also, this can be done only for 3 times in entire tenure of NPS i.e till retirement.

9. At the age of retirement, one has to make decision on how to invest the corpus created. One has to put at least 40% in annuity post retirement. Annuity will give you monthly regular pension on corpus invested for lifetime . One has to create annuity with one of the Annuity Service Providers (ASP). Following are the allowed ASP's :- 

• Life Insurance Corporation of India
• SBI Life Insurance Co. Ltd
• HDFC Life Insurance Co. Ltd
• ICICI Prudential Life Insurance Co. Ltd
• IndiaFirst Life Insurance Co. Ltd.
• Kotak Mahindra Life Insurance Co. Ltd.
• Star Union Dai-ichi Life Insurance Co. Ltd

        

10.  To open NPS account online, visit the NPS website or follow the steps in following pdf. Post this Permanent Retirement Account Number (PRAN) will be generated. This can be consider as your identity number. All your pension related activities are tracked with this number.

Let's take an example of Rahul to understand NPS. Rahul is 25 years old and wants to plan early for his retirement at age 60. His annual salary is Rs. 5 lakhs. He decided to invest 50k in NPS every year. He allocates 75% in Equity, 15% in corporate debt and 10% in government securities with Kotak Mahindra Pension Fund Ltd. Looking at the past 10 years returns the avg. rate of return on NPS can be considered at 9%. 

After 35 years, his invested corpus is Rs. 17.5 lakhs (50k * 35). The total corpus value then would be roughly Rs. 1.25 crores.

At the age of 60, Rahul decides to invest 60% in annuity and withdraw the 40% in lump sum for full tax exemption. He uses the lump sum amount to buy a personal home for retirement. The 60% (Rs. 75 lakhs) is used to buy a LIC annuity scheme with rate of returns of 6.5%. Rahul gets a monthly pension of Rs. 40k. He lives a peaceful life after retirement and is happy that he does not need to be dependent on his children post retirement. 

Thank You.