Intermediate

The national pension system (NPS) is an investment plan which provides financial security and stability to individuals during the later stages in life.

All NPS investors are allotted a unique permanent retirement account number (PRAN) which remains the same for one’s life. PRAN provides access to two accounts for investment: Tier I and Tier II account. Let’s understand this in more detail.

Tier I account:

The Tier I account is a restricted withdrawal retirement account. Your money deposited in this account will be invested as per the option you have chosen; however, this account cannot be used for withdrawals before the stipulated time period. Income Tax benefits are available for these deposits as per the Income Tax Act, 1961.

Tier II account:

The Tier II account is a voluntary savings facility. You are permitted to withdraw funds from this account as per your wish. However, you must have an active Tier 1 account in your name to start investing in the Tier II account. Income Tax benefits are not available on contribution to this account.

Note: There is no upper limit for the maximum contribution either under Tier I or Tier II account.

Available investment choices under the NPS:

As an NPS investor, you have two choices to invest your money – active choice and auto choice.

Active choice: In this option, you decide how your retirement funds will be invested.

You can select from among the following four options:

1. Asset Class E - Investments are made predominantly in equity.
2. Asset Class C - Investments are made in fixed-income instruments other than government securities.
3. Asset Class G - Investments are made in government securities.
4. Asset class A: Investments are made in alternative investment funds (AIFs). This is applicable only for Tier I account.

You can, however, invest as per the limits below for the respective asset classes:

• Invest all your retirement funds in asset classes C or G classes and up to a maximum of 50% in Asset class E. However in Asset Class A, there is a limit of 5%

Auto choice - Life cycle fund

In case you are unable or do not want to make a choice of asset classes, NPS offers auto choice in which your investments will be made in a life-cycle fund. You must note that the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per your age), with the investment in E decreasing and in C & G increasing with your age.

The three life cycle funds available under the auto choice are:

1. LC75 – Aggressive life cycle fund: In this life cycle fund, your investment in equity starts with 75% until age 35 and then gradually reduces as you age.
2. LC50 – Moderate life cycle fund: In this life cycle fund, your investment in equity starts with 50% until age 35 and gradually reduces as you age.
3. LC 25 - Conservative life cycle fund: In this life cycle fund, your investment in equity starts with 25% until age 35 and gradually reduces as you age.

How can you exit from the NPS?

When you reach 60 years of age, you can receive a lump sum of up to 60% of the accumulated retirement corpus. You will need to use the other 40% to purchase an annuity* and receive a monthly pension. You can purchase an annuity for a higher percentage (more than 40%) and receive a smaller amount as the lump sum. However, if the accumulated retirement corpus is less than Rs 2 lakh, you can take the entire sum as a lump sum.

*Annuity refers to the monthly payment that the investor will receive from the annuity service provider after he or she exits from the NPS. An annuity service provider (ASP) is an insurance regulatory and development authority (IRDA)-registered insurance company empanelled by PFRDA. ASPs are responsible for managing the funds (allocated for buying an annuity) and payment of the pension after a subscriber attains the age of 60.

You can delay the withdrawal until the age of 70 if you don’t need the funds. You can also continue investing in your NPS account until 70 years of age. An annuity purchase can be deferred by a maximum of three years.

You also have an option to exit from your NPS account before you reach 60 years of age; however, you will need to complete 10 years of being invested in the NPS before you exit. Additionally, in this case, you need to use at least 80% of your accumulated retirement funds to purchase an annuity. If your accumulated retirement corpus is less than Rs 1 lakh, you can take the entire amount as a lump sum.

If the NPS investor dies before account maturity, the nominee can receive the entire amount as a lump sum. However, if the nominee wants to continue the NPS account, he/she will need to go through the know-your-customer (KYC) requirements.

The NPS also allows partial withdrawals from a Tier I account under the following rules:

1. Up to 25% of the contribution is allowed to be withdrawn after completing 10 years.
2. Three withdrawals can be made with a minimum gap of five years** between each withdrawal.
3. Partial withdrawals are permissible only in the case of:

• Child’s higher education or marriage.
• Treatment of critical illness of self/spouse/children/dependent parents.
• Purchase or construction of first house.

**Exception to five-year gap rule in case of critical illness or accident and life-threatening ailments.

You should consult your financial advisor before investing in the NPS.