Know about NPS (National Pension System)

Know About NPS (National Pension System), One of the best investment and saving scheme to create corpus for pension.

Creating a corpus after retirement is one of the most important agenda of our financial planning.
Anyone should plan properly not only for the expenses post retirement but to live a better life in golden years.
Its Better to analyze future expenses properly and need to plan up to live your post retirement life happily without ups and downs.


Generally there are two stages in our life cycle for financial planning. One is accumulation stage and other one is retirement stage.
In accumulation stage, normally one creates corpus by investing in many assets as per appetite and capacity for the investment.
In retirement stage, One looks for stable income that can take care of expenses and living after post retirement life. This income depends basically what corpus created in accumulation stage.

Now the most important factor is we need to create a good corpus during accumulation stage to get a better income in our retirement stage.
The question is how can we create good corpus in our accumulation stage.
With this aim to create a good corpus , Government presented National Pension Scheme, popularly known as NPS. NPS is a scheme specially designed for retirement purpose.

Remember, The return in NPS are depends on the equity market. But nothing to worry as in the long run return of equity markets are always higher in comparison to other related investments. Here with NPS you are getting another strong advantage to manage your money with dedicated and experienced fund manager.

There are two types of account under NPS.

  • Tier I
  • Tier II

For all NPS subscribers, Tier I account is mandatory. This is non withdraw-able permanent retirement account.

Minimum monthly contribution 500/- required for tier I account. For an year it is 6000/-.

For Tier II account, you must have active Tier I account. Voluntary withdraw facility available under this account. That means you can withdraw fund before maturity also under Tier II account. Minimum Contribution required to open a Tier II account is Rs. 1000.

To manage your investment strategy, there are two choices available under NPS.

  • Auto Choice
  • Active Choice

Under auto choice, The allocation of funds will be done as per auto defined formula. It is based on the age of investor.

The Investment allocation is made under 3 asset classes.

  • Equities
  • Corporate Bonds
  • Government Securities

Under active choice, the allocation of funds decides by investor itself. However there is a cap of 50% investment in equity. For govt sector equity cap is increased to 15%.

When the age will turn 60. Investor can exit but 40% of the pension corpus has to be utilized for the purpose of annuity. This exit condition only applied on NPS tier I account.

Tax Benefits on NPS

As per latest Tax rule, Investment of up to 10% of your basic salary and dearness allowances  or maximum of 1.5 lac per year. Whichever is lower, It is Tax free under NPS investment.  From FY 15-16, Now investor is getting additional benefits of Rs. 50,000 from gross taxable income along with 1.5 lac. Now total benefit under NPS is 2 lacs per year per investor. Remember this benefit is applicable in Tier I account.

Accumulation and growth of corpus are not taxable.

If you are withdrawing lump sum from NPS, It is taxable.  The funds utilizing to buy annuity also not taxable. However pension income is taxable like other pension plan. This means if you are utilizing 100% accumulated corpus for buying annuity, nothing will deduct for tax.

In budget 2016, Govt of India approved, up to 40% of total accumulated corpus are tax free on maturity.

You can also read about Mutual Fund


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