Key Points

Details

Benefits of NPS

  1. Lowest Cost Retirement Saving Products
  2. Tax Benefits
  3. Market-Linked Returns
  4. Portable
  5. Managed Professionally

Steps in NPS

  1. Open an NPS Accounts
    1. Only individuals can open it
  2. Choose a suitable asset allocation
    1. Equity, Debt etc
  3. Contribute to NPS
    1. Similar to SIP
  4. Corpus Accumulates at Retirement
  5. Withdraw lumpsum and choose an annuity plan
  6. Receive Pension

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Types of Accounts

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You have have two different accounts (One tier 1 and other tier 2) and focus on different Asset Classes (Like Debt in one and Equity in the other)

Field Tier 1 Tier 2
Purpose Retirement Planning Investment Planning
Eligibility Indian Citizens between 18 and 70 years of age Only the ones with Tier 1 account
Lock In For 3 years for partial withdrawal, otherwise 60 None
Opening Contribution Rs 500 Rs 1000
Minimum Yearly Contribution 6000 per year Not mandatory, 250 Rs
Tax benefits Upto Rs 2L None

Asset Classes in NPS

NPS Offers 4 different asset classes

  1. E - Equity
    1. Money gets invested in the stock market
    2. High Risk, High Return
  2. G - Government Securities
    1. Bonds, other securities issued by central and state government
    2. Low Risk, Low Return
  3. C - Corporate Bonds / Debt
    1. Issued by PSUs and stuff
    2. Moderate Risk, Moderate Return
  4. A - Alternative Investment Funds
    1. Oil, Real Estate (REIT) etc
    2. Very High risk, moderate returns

A combination of this determines how much your corpus grows to when you retire

Asset Allocation

  1. Auto Choice
    1. When you are young, it starts with equity driven portfolio. It moves to debt as you grow older
    2. There are 3 choices here
      1. Aggressive Lifecycle Funds - Equity capped at 75%
      2. Moderate Lifecycle Funds - Equity capped at 50%
      3. Conservative Lifecycle Funds - Equity capped at 25%
    3. Assets allocation is automatically changed on your birthday
  2. Active Choice
    1. Only use this if you know how to rebalance

You can switch between them one every financial year

UPDATE 2022 : You can now choose different asset managers for different asset classes

Best Fund Managers Across Different Classes

https://www.etmoney.com/nps/pension-fund-manager

Amount you can invest in each sector

There’s a table, that says you can invest max 75% in equity and after 50, it reduces by 2.5% every year and gets allocated to Debt

Update 2023 - Now, you can avoid the gradual reduction and keep 75% in equity upto 60 years (Tier 1) and 100% equity (Tier 2)

Returns

Fund Managers

You cannot choose different Fund Managers for Different Schemes within the same Tier.
You need to see how the pension fund manager has done on a portfolio basis

You can change your manager once in a financial year.

Enrolling into NPS

You can do it offline or online

  1. Go to enps.nsdl.com
  2. Complete Bank Account opening form
  3. Enable KYC Verification via Aadhar or upload scanned copy
  4. Verify via netbanking or upload copy of cancelled check
  5. Pay Account Opening charges via payment gateway
  6. Make 1st contribution online

The system will give you a 12 digit PRAN (Permanent Retirement Account Number)

Minimum Contribution

6000 Rupees

Penalty

If you do not pay the minimum, your account is frozen and you need to pay the entire amount plus a penalty of 100 rupees per year

Withdrawing out

At 60, you have 3 options

  1. Defer withdrawing until the age of 75 and continue contributing
  2. Defer withdrawing but stop contributing
  3. Exit at the age of 60
    1. 60% you will get as lumpsum
      • UPDATE 2023 - Now you can withdraw as lumpsum or in a periodic basis
      • No tax is applicable on SLW Receipts
      • Rest of the Corpus continues to grow
    2. 40% to purchase annuity

Before 60 (Full withdraw)

Before 60 (Partial Withdraw)

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Eg : If you invested 1L and it’s now 3L, you can only withdraw 25% of 1L

Annuity

Annuity

An annuity is a contract with fixed rate of return giving the holder (Retiree) predictable income. In India, this is called Pension

Update 2023 - Multiple Annuities can be chosen

Tax Exemption (EEE Instrument)

EEE - Exempt-Exempt-Exempt

1.5L limit is including everything under Sec-80C (EPF, PPF, Sukanya Samriddhi Yojana, Mutual Funds MF) etc

Tax when Withdrawing

When you think about tax slab when retiring, it will be very low (0-10%)

Systematic Lumpsum Withdrawal

Charges on NPS

Drawbacks Against Mutual Funds

NPS vs Mutual Funds

Some Tips

Sources