National Pension Scheme (NPS)

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NPS or National Pension Scheme

In January 2004, a pension scheme named National Pension Scheme (NPS) was established as a government-sponsored pension scheme. A pensioner can contribute to one’s pension account on a regular basis during his/her working life and subsequently withdraw a portion of the reservoir in a lump sum, and utilise the remainder of the reservoir to purchase an annuity to provide a regular income after retirement.

NPS

Advantages of NPS

The advantages of NPS are as follows:

  1. It is optional – A Subscriber/pensioner may contribute at any moment throughout the tax year and may modify the amount he/she wishes to set apart and preserve each year.
  2. It’s simple and convenient – The subscriber/pensioner must establish an account with any of the POPs (Points of Presence) or through eNPS (https://enps.nsdl.com/eNPS/).
  3. It is customisable Subscribers/Pensioners/Retirees may pick their own investment alternatives and pension fund and see their money increase.
  4. It is portable – Subscribers/Pensioners/Retirees may access their accounts from anywhere, even if they change cities or jobs.
  5. It is efficiently regulated PFRDA regulates NPS, and it has clear investment criteria as well as periodic monitoring and performance evaluations of fund managers by the NPS Trust.

Top Performing NPS Schemes

By Trailing Returns

Scheme Name NAV Trailing Returns (in %)
1 Year 3 Year 5 Year
LIC Pension Fund – Scheme E – TIER II 24.35 56.66 14.52 13.60
UTI Retirement Solutions – Scheme E – TIER II 37.14 56.21 15.11 15.20
LIC Pension Fund – Scheme E – TIER I 29.09 56.20 14.32 13.67
ICICI Prudential Pension Fund – Scheme E – TIER I 45.97 55.37 15.51 14.93
ICICI Prudential Pension Fund – Scheme E – TIER II 36.35 55.26 15.63 15.01

Most Consistent NPS Schemes

Scheme Name NAV AUM (Rs. Cr)
Kotak Pension Fund – Scheme A – TIER I 14.18 3.86
ICICI Prudential Pension Fund – Scheme E – TIER I 45.97 3797.18
ICICI Prudential Pension Fund – Scheme C – TIER II 31.45 113.99
ICICI Prudential Pension Fund – Scheme E – TIER II 36.35 197.79
LIC Pension Fund – Scheme A – TIER I 14.55 4.99

ACTIVE & AUTO CHOICE IN NPS

Active choice:

In contrast to typical investment products, NPS allows you to create your portfolio. Depending on your risk tolerance, you may build your portfolio by distributing Funds among the four asset types offered. This is referred to as Active Choice. These four asset classes are available under Active choice:

  1. Equity or E
  2. Corporate Debt or C
  3. Government Securities or G
  4. Alternative Investment Funds or AIF

Auto Choice:

At times creating your portfolio might be a little tricky and time-consuming. If you do not wish to use the Active option, NPS allows you to choose a dynamic and automated allocation of your portfolio, known as the Auto choice.

Your money will be invested in asset classes – E, C, and G – in predetermined amounts based on your age in Auto choice. As an individual’s age grows, his or her exposure to equity and corporate debt decreases, besides his or her exposure to government securities increases. There are three alternatives accessible under Auto Choice based on the risk appetite of the subscriber: aggressive, moderate, and conservative.

  1. Aggressive (LC-75) – Maximum Equity exposure is 75% up to the age of 35.
  2. Moderate (LC-50) – Maximum Equity exposure is 50% up to the age of 35.
  3. Conservative (LC – 25) – Maximum Equity exposure is 25% up to the age of 35.

What are the revised guidelines of NPS?

  • With the new entry and exit guidelines, one joins the NPS from 65 years to 70 years as the entry age has been updated to 18-70 years from 19-65 years.
  • If you are an Indian Citizen or an NRI or Overseas Citizen of India (OCI) between the age group of 65-70 years old, you can also invest your funds in NPS and be a part of the scheme for up to 75 years.
  • According to the amended age eligibility requirements, retirees/pensioners who have previously closed their NPS accounts can open a new account.
  • Similarly, if retirees/pensioners over the age of 65 choose the ‘Auto Choice,’ the maximum equity share will be 15%, whereas the maximum equity exposure would be 50% if they choose the ‘Active Choice.’
  • The exit condition for retirees/pensioners joining NPS after the age of 65 will have a normal exit period of three years, as stated by PFRDA. Furthermore, exiting before the end of three years will be considered a ‘premature exit’.
  • As per the new norms of PFRDA, the entire reservoir is paid to the nominee as a lump sum when the pensioner dies.
  • The PFRDA has authorised retirees/pensioners who join the plan after the age of 65 to invest up to 50% of their assets in the equities.

Tax Benefits Related to the NPS

Section Tax Exemption
Section 80 CCD-1 A  deduction of Rs 1.5 lakhs or less.
Section 80 CCD-2 A deduction of 10% of the basic pay that has been invested in NPS by the employer
Section 80 CCD-1B Deduction of up to Rs 50,000 is available for voluntary donations to the NPS plan.


FAQs about NPS

✅ Who will manage my NPS investments?

In accordance with the provisions of the PFRDA Act, pension funds are responsible for investing contributions, collecting them, and maintaining pension corpus through different plans within the National Pension System.

✅ What exactly is Net Asset Value (NAV)?

NAV stands for Net Asset Value. This is the cost of one fund unit. Every working day, the NAV is computed. It is determined by summing the value of all securities and cash in the fund’s portfolio (its assets), deducting the fund’s liabilities, and dividing the result by the number of units issued.

 Which is preferable- NPS Tier 1 or NPS Tier 2?

Tier 1 of the NPS is a rigorous retirement plan, and Tier 2 allows for additional withdrawal flexibility if necessary. The concept is to promote a government-backed product that gives equity exposure, assists you in retirement planning (Tier 1), and allows you to invest for other life goals (Tier 2).

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