The Buyt Desk
National Pension System(NPS) is a pension focussed scheme. The sole purpose of NPS is to ensure accumulation of a retirement corpus. It was launched in 2004 for government employees only but later it was extended for private sector salaried employees and even self-employed were allowed to have a pension account under the NPS scheme.
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It is a defined contribution plan
The member of NPS contributes a certain amount towards the retirement corpus. The contribution could be as low as Rs 500. When the member turns 60 years of age he/she is allowed to withdraw 60% of the corpus and with the rest of the 40%, they have to buy an annuity plan which will be paid out like a regular pension.
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Asset Classes offered by NPS
There are 3 asset classes offered by NPS Pension Fund Managers (PFMs) for investment. You can choose from any of the following-
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Equity (E) – Scheme invests predominantly in Equity market instruments
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Corporate Debt (C) – Scheme invests in Bonds issued by Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Infrastructure Companies and Money Market Instruments
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Government Securities (G) – Scheme invests in Securities issued by Central Government, State Governments and Money Market Instruments
3.Two choices of Asset Allocation
You can either take an active choice or an auto choice. In an active choice, you make your choice about how much you want to allocate to equity( you can’t allocate more than 75%), Corporate( up to 100%) or Government securities(up to 100%).
After 50, the upper limit of equity tapers by 2.5 per cent each year until it reaches 50 per cent by age 60.
In the Auto choice, the investments are made in a life-cycle fund with three life cycle funds (LC) to choose from
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Moderate Life Cycle Fund: It is the default option that caps the equity exposure to a maximum of 50%
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Conservative Life Cycle Fund: As the name suggests, it takes a conservative approach to invest with maximum equity allocation capped at 25%
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Aggressive Life cycle Fund: In this option, maximum equity allocation can go up to 75%
4. Tax Advantage of NPS
It is an exempt-exempt-exempt (EEE) product, you get tax advantages when you invest , interest earned is tax free and withdrawal of 60% of the corpus is also exempted from tax.
5. What happens on voluntary retirement?
On normal retirement, you can withdraw 60% of the corpus accumulated, totally tax-free. However, if you choose to retire before 60, you will be allowed to withdraw only 20% and the rest will need to be invested in annuity. Ff the subscriber dies before retirement the nominee can withdraw the entire corpus and does not need to invest anything towards an annuity.
