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National Pension Scheme

National Pension Scheme National Pension Scheme (NPS) was initially launched by the Government in 2004 with the objective of changing the pension of retiring Government employees from defined benefit to defined contribution plan. In 2009, the scheme was opened for citizens of India. The broader objective of NPS is to convert India from a pension less society to a pensioned society like many developed economies.

Investment options in NPS

In NPS the contributors can decide where to invest their contributions to the National Pension Scheme. Investor can decide between two choices:-

Active Choice : This is for informed investors who can decide where they want to invest their NPS contributions. There are four asset classes that you can choose from, depending on your risk appetite and investment needs. You can invest in multiple asset classes.

  • Asset Class E: Equity
  • Asset Class D: Corporate debt
  • Asset Class G: Government bonds
  • Asset Class A: Alternative investments like REITs, AIFs, InvITs etc.

Auto Choice : This is for investors who cannot decide on their own, where they to invest their NPS contributions. This option is like a life-cycle fund, where the asset allocation depends on the investors age. There are three options in auto choice:-

  • Aggressive lifecycle fund: In this equity allocation is higher than the other two options
  • Moderate lifecycle fund: In this equity allocation is higher than conservative but lower than the aggressive option
  • Conservative lifecycle fund: In this equity allocation is lower than the other two options

Types of NPS accounts

Tier I Account : This account does not allow premature withdrawal before retirement (60 years of age). You can open a Tier I NPS account, with a deposit of Rs 500. You can claim tax deductions of up to Rs 50,000 from your taxable income under Section 80CCD by investing in Tier I account.

Tier II Account : This account allows withdrawal prior to retirement age. You can open a Tier II NPS account, with a deposit of Rs 1,000. Tier I Account is mandatory requirement to open a Tier II Account. Tier II NPS account is a voluntary savings facility; you cannot avail Section 80CCD tax benefits in Tier II account.

Pension fund managers

Private sector employees can select among 11 pension fund managers. However, Government employees have to select from SBI Pension Fund, LIC Pension Fund and UTI Retirement Solutions only.

SBI Pension Funds Pvt. Ltd.

LIC Pension Fund Ltd.

UTI Retirement Solutions Ltd.

HDFC Pension Management Co. Ltd.

ICICI Prudential Pension Fund Management Co. Ltd.

Kotak Mahindra Pension Fund Ltd.

Aditya Birla Sun Life Pension Management Ltd.

Tata Pension Management Ltd.

Max Life Pension Fund Management Ltd.

Axis Pension Fund Management Ltd.

Charges

Intermediary Charge Head Service charges Method of Deduction
Central Record Agency (CRA) PRA Opening Charges Rs.50 Through cancellation of units at the end of each quarter
Annual PRA Maintenance per account Rs.190
Charge per Transaction Rs.4
Point of Presence (POP)(Maximum permissible charge for each subscriber) Initial Subscriber Registration Rs.100 To be collected upfront
Initial Contribution Upload 0.25% of the initial contribution amount.Min: Rs 20 Max: Rs 5,000
Any subsequent transaction involving contribution upload 0.25% of the contribution. Min: ` 20 Max: ` 25,000
Any other transaction not involving a contribution from subscriber Rs.20

NPS taxation on maturity

As per NPS rules, you can withdraw up to 60% in lump sum on maturity. This withdrawal is totally tax exempt, making NPS an extremely tax efficient investment option. The remaining 40% must be in re-invested in purchasing annuities (annuity is a fixed monthly sum received by the investor). Life Insurance Corporation of India (LIC) is the default annuity service provider, but you can also choose from 13 other annuity service providers empanelled with PFRDA. The annuities received by you, will be added to your income and taxed as per your income tax rate.