NPS Basics to help you get started

A single post on NPS will be like writing a book. So I’ll restrict this to the basics of NPS that each one should know before taking an NPS account.

NPS or National Pension Scheme is a government-sponsored pension scheme. Earlier it was restricted to government employees but now it has been open to all. Any Indian citizen between 18 and 60 years can join NPS.

Returns of NPS are not guaranteed as the investments are spread across equity markets(SCHEME E) government securities(SCHEME G) and corporate bonds(SCHEME C). Subscriber is free to choose Auto Choice or Active Choice. In Active Choice, subscriber has to decide the allocation between the schemes and in auto choice it is selected based on your age.

You can open an eNPS account directly with NSDL or Karvy or else you can choose to open an account via any POPs Point of Presence. POP can be anyone like your bank or Postoffice etc. I’ll suggest you should open an account via a POP especially your bank that you have a relationship with. It will be helpful as they would help with any changes or modifications to be made in your account. Otherwise, you might have to visit an NSDL or Karvy office or courier them the forms for any requests. The choice is on you, however, the charges are nominal for accounts maintained via POP. Also, you can anytime switch from POP to eNPS. I have done that too but I don’t suggest you do it.

Now NPS has two types of account. Tier 1 and Tier 2. Tier 1 allows for the extra 50,000/- exemption under Section 80CCD but you can withdraw only after your 60th birthday. Tier 2 is, however, unrestricted and you can transact anytime. I don’t suggest anyone open Tier 2. However, Tier 1 is mandatory and allows for the income tax exemption. One thing to note here is that minimum contribution to Tier 1 in a year is 6000/-.

At the moment, there are eight pension fund managers:

  • ICICI Prudential Pension Fund
  • LIC Pension Fund
  • Kotak Mahindra Pension Fund
  • Reliance Capital Pension Fund
  • SBI Pension Fund
  • UTI Retirement Solutions Pension Fund
  • HDFC Pension Management Company and
  • DSP BlackRock Pension Fund Managers

You need to select one of them while opening the account. You can change this later on whenever you feel your fund manager isn’t delivering good returns.

Ahh, I forgot to mention that all NPS subscribers will be allocated at 12 digit PRAN – Permanent Retirement Account Number. Also, one can open only one NPS account.

I hope the information would have been helpful in opening an NPS account. I’ll cover more related to withdrawals in a separate post.

Should you consider opening NPS?

I don’t recommend opening an NPS account unless you need to claim that extra 50,000/- benefit under Section 80CCD. If you are still trying to fill up 80C limit of 1.5lakhs do stick to ELSS. It’s not worth investing more than 50,000/- in NPS because of low liquidity. It’s difficult to get back your money in an emergency and you may need to wait till 60.

Another important thing to note here is you will not get the entire invested money back. You’ll get only 60% of the fund value. The rest 40% should be used to buy an annuity plan from a government-specified annuity provider. 60% of the corpus is tax exempted. However, the income that you receive from the 40% (annuity), you need to pay income tax under normal slab rates.

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