The National Pension System – NPS

a. Returns/Interest

• A portion of the NPS goes to equities (this may not offer guaranteed returns). However, it offers returns that are much higher than other traditional tax-saving investments like the PPF.
• This scheme has been in effect for over a decade, and so far has delivered 8% to 10% annualised returns.
• In NPS, you are also allowed the option to change your fund manager if you are not happy with the performance of the fund.

b. Risk Assessment

• Currently, there is a cap in the range of 75% to 50% on equity exposure for the National Pension Scheme.
• For government employees, this cap is 50%. In the range prescribed, the equity portion will reduce by 2.5% each year beginning from the year in which the investor turns 50 years of age.
• However, for an investor of the age 60 years and above, the cap is fixed at 50%.
• This stabilizes the risk-return equation in the interest of investors, which means the corpus is somewhat safe from the equity market volatility.
• The earning potential of NPS is higher as compared to other fixed-income schemes.

c. Tax efficiency – NPS tax benefit

• There is a deduction of up to Rs.1.5 lakh to be claimed for NPS – for your contribution as well as for the contribution of the employer. – 80CCD(1) covers the self-contribution, which is a part of Section 80C.
• The maximum deduction one can claim under 80CCD(1) is 10% of the salary, but no more than the said limit.
• For the self-employed taxpayer, this limit is 20% of the gross income. – 80CCD(2) covers the employer’s NPS contribution, which will not form a part of Section 80C.
• This benefit is not available for self-employed taxpayers. The maximum amount eligible for deduction will be the lowest of the below: a. Actual NPS contribution by employer b. 10% of Basic + DA c.
• Gross total income – You can claim any additional self contribution (up to Rs 50,000) under section 80CCD(1B) as NPS tax benefit. The scheme, therefore, allows a tax deduction of up to Rs 2 lakh in total.

d. Withdrawal Rules After 60

• Contrary to common belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement.
• You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm. The remaining 60% is tax-free now. 

e. Early Withdrawal and Exit rules

• As a pension scheme, it is important for you to continue investing until the age of 60. However, if you have been investing for at least three years, you may withdraw up to 25% for certain purposes.
• These include children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others.
• You can make a withdrawal for up to three times (with a gap of five years) in the entire tenure. These restrictions are only imposed on tier I accounts and not on tier II accounts.

f. Equity Allocation Rules

• The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. You can allocate a maximum of 50% of your investment to equities. 
• There are two options to invest in – auto choice or active choice. The auto choice decides the risk profile of your investments as per your age.
• For instance, the older you are, the more stable and less risky your investments. The active choice allows you to decide the scheme and to split your investments.

g. Option to change the Scheme or Fund Manager

• With NPS, you have the provision to change the pension scheme or the fund manager if you are not happy with their performance.
• This option is available for both tiers I and II accounts.

The two primary account types under the NPS are tier I and tier II. The former is the default account while the latter is a voluntary addition. The table below explains the two account types in detail.