While there is a long-standing demand of government employees in some states to move their employment status from the old pension scheme to National Pension System (NPS), we deconstruct here the key features of the latter that came into existence in January 2004.
NPS enables subscribers to accumulate a corpus for retirement by investing in all four asset classes namely equity, securities, corporate bonds and alternative investment funds (AIFs).
The NPS account can be opened by anyone in the age group of 18-70 (including NRIs). While making a contribution to NPS, it is vital to note that the payment cannot be made via a credit card. One can use other modes of payment such as net banking, debit card and UPI.
Although opening an NPS account is mandatory for government employees, it is voluntary for private sector employees. However, the private sector employees who want to open an NPS account can make note of its following features:
On the other hand, the old pension system is only meant for government employees and does not call for any contribution from subscribers of any kind.
Two categories
At the outset, one must know that there are two categories of NPS: Tier-1 (main account) and the add-on which is known as Tier-II account.
Opening a Tier-1 account is mandatory if you are an NPS subscriber and investing in Tier-II is completely discretionary. There is a requirement of making a minimum contribution of ₹1,000 per annum in the Tier-1 account, whereas there is no such minimum subscription that needs to be made in the tier-II account.
Tax benefit
The contribution made to NPS is eligible for exemption up to ₹1,50,000 under Section 80CCE of Income Tax Act. An additional exemption is given for contribution of ₹50,000 under section 80CCD(1B).
Lock-in period
Contributions made to tier-1 accounts have a lock-in period till retirement whereas contributions made to Tier-2 do not have any lock-in. At the time of closure of scheme, subscribers can withdraw 60 percent of corpus from Tier-I account whereas the remaining 40 percent must be used to buy annuities. At the same time, the entire corpus of Tier-II can be withdrawn on subscriber’s own volition.
Investment choices
There are two types of investment choices for investors: active choice and auto choice.
In the active choice, subscribers can determine the ratio in which investment is made in different asset classes i.e., equity, corporate debt, government securities and alternative investment funds.
On the other hand, auto choice enables investors to opt for asset ratio in a predetermined ratio. The ratio could, however, vary based on the option chosen, conservative, moderate and aggressive.
While choosing the proportion of asset class, subscribers must note that contribution value cannot be more than 5 percent for Alternative Investment Funds and for Tier-II, one can allocate 100 percent to equity whereas for Tier-I, one can allocate up to 75 percent to equity.
Those who want to open an account can do so online through the eNPS portal.
