Planning for retirement is essential for a financially comfortable life in the older years when your source of income stops. If you have created a retirement fund you can use it to fund your retirement. The National Pension Scheme is one such retirement oriented pension scheme which has been launched by the Government to help you plan your retirement.

What is the National Pension Scheme?

The National Pension System (NPS) is a long term saving scheme which allows you to save regularly and accumulate a considerable retirement corpus. The scheme invests your savings in market-linked funds which help you create an inflation adjusted corpus for your retired years. There are two types of NPS accounts which you can invest into when you subscribe for the scheme – Tier I Account and Tier II Account. Tier I Account is compulsory while Tier II Account is voluntary. Being a mandatory account, it offers you various benefits and also has different funds for investments.

Features of NPS Tier I Account

Tier I NPS Account is the primary account and if you want to subscribe to the NPS scheme, you have to open this account in your name. Given below are the salient features of the account which you should know –

  • NPS Tier I Account is a long term investment account which runs till you attain 60 years of age. Even after maturity, you can defer the maturity age by another 10 years and choose to remain invested till 70 years of age
  • Partial withdrawals are allowed from Tier I Account for meeting specific financial needs like marriage costs, education expenses, medical emergencies, etc.
  • Investments done into the Tier I Account earn you tax deductions
  • Only one account of NPS Tier I can be opened in one name
  • Premature closure of the Tier I NPS account is available subject to certain terms and conditions

Eligibility to open an account of NPS Tier I

To open a NPS Tier I Account the following eligibility conditions have to be fulfilled –

  • You should be aged between 18 and 60 years
  • You should be a resident Indian or a NRI. If you open the account as a NRI and later you change your residential country, the account would be closed
  • To open an NPS Tier I account, you have to make a minimum contribution of Rs.500. Thereafter, in one financial year, a minimum contribution of Rs.1000 should be made towards NPS Tier I.

NPS Tier I Withdrawal and premature closure

You can withdraw from the account partially if you need funds. There are NPS Tier I withdrawal rules which should fulfil before the withdrawal would be allowed. These rules are as follows –

  • You can withdraw only after the completion of 3 years from the date of investment into the scheme
  • A maximum of 25% of the available fund value can be withdrawn at once
  • A maximum of three withdrawals would be allowed throughout the investment period
  • The withdrawal should be done for a valid financial requirement like higher education, marriage, purchase of house or medical emergencies

If you want to exit from the scheme and close the account altogether, it would be called premature closure. When you do such a closure, you can withdraw 20% of the corpus in lump sum while 80% would be used to pay annuities. However, if the accumulated corpus on such closure is below Rs.1 lakh, the entire corpus would be paid in lump sum.

NPS Tier I tax benefits

As mentioned earlier, you get tax benefits by investing in a Tier I Account of the NPS scheme. These benefits are as follows –

  • Investment up to Rs.1.5 lakhs would be allowed as a deduction under Section 80CCD (1). This limit includes the deductions under Section 80C
  • Additional investment of up to Rs.50,000 would be allowed as a deduction from taxable income under Section 80 CCD (1B)
  • If your employer contributes to the NPS scheme, up to 10% of your basic salary and dearness allowance would be allowed as a deduction under Section 80 CCD (2)
  • Partial withdrawals from Tier I Account would be tax-free in your hands
  • On maturity, up to 60% of the accumulated fund value can be availed in lump sum. This lump sum withdrawal would be completely tax-free in your hands
  • The annuity benefits paid by the scheme would be taxable in your hands at your income tax slab rates

How do Tier I NPS investments work?

When you invest in the NPS Tier I Account, you are presented with a choice of two investment strategies – Active Choice Strategy and Auto Choice Strategy. The Active Choice strategy is when you invest in a choice of investment funds while under the Auto Choice strategy, the investment is allocated to funds in a predetermined ratio depending on your risk profile. The investment funds available under the NPS scheme are as follows –

Invest in elss funds
  • Asset Class E which invests at least 50% of the portfolio in equity
  • Asset Class C which invests in fixed income instruments except Government securities
  • Asset Class G which invests in Government securities only
  • Asset Class A which invests in alternative assets

Moreover, there are eight pension fund managers and you can choose anyone for managing your investments. These fund managers are registered with the PFRDA and include the following –

  • LIC Pension Fund
  • ICICI Prudential Pension Fund
  • UTI Retirement Solutions Pension Fund
  • Kotak Mahindra Pension Fund
  • DSP Black Rock Pension Fund
  • HDFC Pension Management Company
  • Reliance Capital Pension Fund
  • SBI Pension Fund

You can also switch between the available investment funds as well as investment strategy when you want. Based on the performance of the underlying assets, your investments would grow and you would earn a return.

Maturity of the scheme

As mentioned earlier, the NPS scheme matures when you attain 60 years of age. You can also defer the vesting age to 70. Upon maturity, you can withdraw 60% of the corpus in lump sum. From the remaining 40% of the corpus, you get lifetime annuities at a guaranteed rate. There are different types of annuity pay-out options which you can choose from and also the annuity payment frequency. You can also avail a joint life annuity and include your spouse to continue receiving the annuity post your death.

The NPS Tier I Account, therefore, gives you an opportunity to invest in a market-linked

mutual fund investment