National Pension Scheme (NPS)

National pension scheme is an initiative by Pension Fund Regulatory and Development Authority for investment by Indian citizens. This government approved pension scheme is for the government employees in the age group of 18-65 years. This scheme was introduced for the non-government section of the people in 2009.

The amount invested under NPS ranges from a minimum of 500 to as high as 6000.

National Pension scheme types (NPS)

NPS accounts are of two types.

Tier-I Account

This account comes with limitations as you can only withdraw a little amount up to the age of 60 or 65 while the rest amount has to be spent necessarily to buy an annuity. Annuity assures fixed payment at regular investments till the maturity of the plan or till death.

After attaining the age of retirement, the withdrawal limit increases, however, some amount has to be necessarily invested in purchasing the annuity.

The contribution in the scheme varies depending on the type of fund. If it is a government fund, the contribution from employee’s side is 10% basic salary plus the dearness allowance with equal contribution from the employer. The investment is mostly made in corporate or government funds.

In a non-government fund, the investor pays Rs. 6000 or pays Rs. 500 as instalment. The investments are majorly made in corporate or government bonds.

Tier-II Account

It is a flexible saving option where investment is made by choice and money can be withdrawn limitlessly. The deposit amount at the time of opening is Rs 1000 or Rs. 250 monthly is to be deposited. Minimum account balance to be maintained in the account is Rs. 2000 at the end of every year. There is no investment area prescribed. It can be a mix of equity, corporate bonds, FDs or liquid funds.

Types of Funds under National Pension Scheme

Central government bonds – Low risk but volatile at the same time in long term bonds, it promises a return of around 6 %.

State government, PSUs and private firms bonds – Quality of the company is responsible for the risk. A good company might have low risks involved. It promises a return of around 9 %

Index based stocks – High risk as in equity funds, offers a low return of around 4 %

The investor can divide his/her investment amount in different bonds depending on the risk he/she chooses to take. The investment amount and its division keep changing with the age increasing. High age makes the equity percentage less and debt percentage more.

 

Features of NPS

  • Tax benefits under section 80CCE. Tax exemption can be claimed if the investment in NPS is above 1 lakh and the employer is the contributor.
  • Fund management fee has been increased for both government and Non-government fund. Points of presence fee have also been raised.
  • Tax is levied on withdrawals and after maturity, the return received is also taxable.
  • The mandatory annuity limits the incentive and return. There is a limit to choose the insurers from where the annuity is to be bought. The minimal returns out of the scheme are not tax exempted.
  • NPS is low on equity, however, over the longer period it offers high interests.

With so many unfavourable conditions, it doesn’t make a friendly investment option, however, to promote this, there have been certain changes made in the scheme for salaried individuals. Withdrawals have been made tax free. There have been amendments under section 80CCD and the gap between salaried and self-employed has also been removed. The tax benefit is now applicable for self-employed individuals also. Thus, making NPS popular for customers.

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