The National Pension Scheme is a popular government-backed retirement savings scheme open to all resident employees, except for the members of the armed forces. The savings scheme encourages individuals to invest regularly toward their pension account during their active working years. This helps them to save more and develop a disciplined approach towards investments. At retirement, NPS subscribers can withdraw a share of the saved corpus as a lump sum amount and use the remaining amount to buy an annuity, which offers them a regular stream of monthly pensions.
Earlier, the NPS was mandatory for only central government employees from 2004 onwards. However, later the scheme was made available for all Indian residents on a voluntary basis. The scheme is deemed valuable for individuals who work in the private sector, who would need a regular pension post-retirement. Notably, once individuals know about what is NPS they will know that it is portable across job roles and different locations, with tax deductions under Section 80C and Section 80CCD Income Tax Act, 1961.
Key Features and Benefits of NPS
These are the major features and benefits of NPS –
Interest Rate: A portion of the National Pension Scheme is invested in equities, which means returns on investment are not guaranteed but in good market conditions can yield high earnings. In fact, NPS has historically performed better than other traditional tax-saving investments like the Public Provident Fund, delivering accountholders with annualized returns of 9% to 12%.
NPS also offers the flexibility to change the appointed fund manager if they feel they are not satisfied with the performance of their fund.
Risk Assessment: The National Pension Scheme has an equity exposure ceiling of 75% to 50% for all NPS subscribers, except the government employees who have an upper limit of 50%.
For all NPS subscribers, the equity cap on the corpus will be reduced by 2.5% yearly starting from the subscribers’ age of 50. However, for NPS subscribers aged 60 and above, the equity ceiling is set at 50%. This move is done to stabilize the risk-return equation of the scheme and protect investors’ hard-earned savings from the impact of equity market volatility.
NPS offers a higher earning potential than other traditional and fixed-income schemes, making the scheme an effective option for retirement planning. Hence individuals should know what is NPS earning potential and plan their investments accordingly.
Flexibility: NPS participation is categorized as flexible. The subscribers can invest in the NPS fund at any time during a fiscal year and adjust their contribution amount. Individuals can choose their desired investment options and manage accounts online, even if they change jobs or locations.
Regulated: The Pension Fund Regulatory and Development Authority or PFRDA supervises the National Pension System (NPS) with clear investment norms and guidelines, with regular performance assessments and timely monitoring of fund managers by the NPS Trust.
NPS Withdrawal Rules After Retirement
Under National Pension Scheme rules, subscribers can withdraw a maximum of 60% of their saved corpus as a lump sum, and the remaining 40% to get an annuity plan. However, if an NPS subscriber’s saved corpus is less than or equivalent to Rs. 5 lakh, they can withdraw the full amount as a lump sum without getting an annuity. Notably, these withdrawals are subject to NPS tax benefit.
For instance, if an NPS subscriber has a saved corpus of Rs. 4.5 lakhs, they can take out the full amount after they retire. However, if an NPS subscriber’s corpus is more than Rs. 10 lakh, the limit on tax-free withdrawal is set at Rs. 6 lakhs. The remaining Rs. 4 lakhs needs to be used an purchase an annuity.
Though withdrawals from the National Pension Scheme are tax-free, annuity payouts are taxed based on the NPS subscriber’s income tax slab. For instance, if the subscriber’s annuity is worth Rs. 4 lakhs, it will attract tax as per the subscriber’s income tax bracket. The annuity payout is taxed in the years it is received.
NPS Early Withdrawal or Exit Rules
Superannuation: When an NPS subscriber turns 60, they have to use at least 40% of their saved-up pension corpus to buy an annuity, which will offer them a stream of regular monthly pension. The rest of the corpus can be withdrawn by the NPS subscriber as a lump sum. However, if the NPS subscriber’s full accumulated pension amount is less than or equivalent to Rs. 5 lakhs, they can take out 100% of the corpus as a lump sum.
Premature exit: If a National Pension Scheme subscriber leaves the scheme before they reach the age of 60, they have to use a minimum of 80% of their accumulated pension fund to get an annuity. However, if their corpus is less than or equivalent to just Rs. 2.5 lakhs, the NPS subscriber can withdraw the entire corpus as a lump sum.
Death: If an NPS subscriber dies, the entire amount of the accumulated pension corpus will be paid to their choice of nominee or legal heir.
Equity Allocation Rules
The National Pension System offers individuals a variety of options to invest in, including equity. Subscribers can put up a maximum of 50% of their NPS contributions in their choice of equity. They have the option to choose between two distinct investment options, namely – auto choice or active choice. In the auto choice option, the NPS scheme automatically allocates subscribers’ investments across different asset classes as per their age. For example, if young individuals can afford to make a higher allocation in equity, which is riskier than traditional savings plans or debt funds. However, equities have the potential to generate much higher returns on their investment. As subscribers get older, their allocation in equity units will gradually decrease and their allocation in other safer assets, like bonds, will increase. Alternatively, in active choice, subscribers will have more control over their investments. They can choose how much capital to invest in each type of asset class, and they can choose investment schemes within asset classes to route them.
Keeping these aspects of what is NPS in mind, individuals can plan their investment in the scheme. However, individuals should identify their risk-taking capacity to decide the percentage of investment in assets.