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Different Types of NPS Accounts Explained

Different Types of NPS Accounts Explained

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Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.

The origins of modern retirement plans could be traced back to the American Revolutionary wars when soldiers were provided with a monthly lifetime income. The system has come a long way and is adopted by all governments – central or federal as well as states. The Indian equivalent that comes to mind is the NPS or the National Pension Scheme. While you may learn more about the NPS by reading this article, we could now look at what different types of NPS exist.

What is the National Pension System? 

NPS is an easily accessible, low-cost, tax-efficient, flexible, and portable retirement savings account introduced by the Government of India. It was initially meant for government employees but later on, the scheme was opened to all Indian citizens. The concept in general is fairly simple. You can open an NPS account and contribute a certain amount at regular intervals. At the time of retirement at the age of 60, you can withdraw 60% of the amount accumulated and the balance 40% needs to be invested in an annuity plan where you will get regular income for the remainder of your life.

What are the benefits of NPS?

  • It is voluntary - Contribute at any time in a Financial Year and change the amount
  • It is simple - Open an account with any one of the POPs (Point of Presence) or through eNPS.
  • It is flexible - Choose your investment options and pension fund 
  • It is portable - Operate the account from anywhere
  • It is regulated - Regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.

What is the difference between NPS Tier 1 and Tier 2?

NPS provides you with two types of accounts: 

Tier 1 and Tier 2:

Tier 1 account

This is the first step of creating an NPS account. Tier 1 account is a restricted and conditional retirement account, withdrawable only upon meeting the exit conditions prescribed under NPS rules.

Tier 1 account

Voluntary savings facility available as an add-on to any Tier 1 account holder. You can open a Tier 2 account only after you have an active Tier 1 account. However, you are free to withdraw the amount from this account at any time unlike Tier 1.

Below are a few significant benefits of Tier 2 NPS Account:

  • No additional annual maintenance Charge
  • Saving for your daily needs (withdrawal at any point in time)
  • Transfer fund to pension account (Tier 1) any time
  • No minimum balance is required
  • No levy of exit load
  • A separate Nomination facility is available
  • Option to select different Investment patterns from Tier 1

Active Choice vs Auto Choice in NPS, which is better?

NPS is a market-linked voluntary pension account. Hence, when opening an account, you can choose the way you wish to invest in the scheme. The NPS offers two approaches to investing subscriber’s money: 

Active Choice: Individual Funds 

In this scheme, you get the freedom to decide on the contribution to be invested. You will have to select the Provide the PFM (Pension Fund Managers), Asset Class, and percentage allocation to be done in each scheme of the PFM. 

There are four Asset groups from which the allocation is to be specified under a single PFM. 

  • Asset class E - Equity and related instruments 
  • Asset class C - Corporate debt and related instruments 
  • Asset class G - Government Bonds and related instruments 
  • Asset Class A - Alternative Investment Funds, including instruments like CMBS, MBS, REITS, AIFs, InvlTs, etc. 

Multiple Asset Class under a single PFM: 

  • The maximum permitted Equity Investment - 75% of the total asset allocation, up to 50 years of age. 
  • Maximum permitted Equity Investment from 51 years and above will be per the equity allocation matrix provided below. 
  • Percentage contribution value cannot exceed 5% for Alternative Investment Funds. 
  • The total allocation across E, C, G, and A asset classes must be equal to 100%. 

Equity Allocation Matrix for Active Choice

Auto Choice: Lifecycle Fund 

The proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per the Subscriber's age). Auto Choice is the best option if the objective is reduced exposure to risky investments.

Depending upon the risk appetite of the Subscriber, there are three different options available:

(i) LC75 - Aggressive Life Cycle Fund: Cap of 75% of the total assets for Equity investment. The exposure starts at 75% till 35 years of age and gradually reduces as per the age of the Subscriber. 

(ii) LC50 - Moderate Life Cycle Fund: Cap of 50% of the total assets for Equity investment. The exposure starts at 50% till 35 years of age and gradually reduces as per the age of the Subscriber. 

(iii) LC25 - Conservative Life Cycle Fund: Cap of 25% of the total assets for Equity investment. The exposure starts at 25% till 35 years of age and gradually reduces as per the age of the Subscriber. 

To cut a long story short:

In NPS, the individual contributes, and the employer can also co-contribute to the social security/welfare of the individual. The accumulated wealth depends on the contributions made and the income generated from the investment of such wealth. Remember, the greater the value of the contributions, the greater the investments achieved; the longer the term and the lower the charges deducted, the larger would be the accumulated pension wealth.

Frequently Asked Questions

1. Who can join NPS?

 Any Indian citizen between 18 and 60 years can join NPS provided the person confirms with know your customer (KYC) norms. You can open an NPS account with Point of Presence (POP) entities. Most banks as well as financial institutions, are enrolled as POPs and are authorised as the collection points.

2. What is a Permanent Retirement Account Number (PRAN)?

 It is a 12-digit unique number called Permanent Retirement Account Number or PRAN. 

3. Can I have more than one NPS account?

 No, you cannot open multiple NPS accounts since it is portable across sectors and locations.

4. What is the minimum contribution in the NPS?

 A minimum contribution of ₹6,000 to your Tier 1 account can be made in a financial year, failing to do so will result in your account being forzen. Unfreezing would require visiting the POP and paying the minimum required amount and a penalty of ₹100.

5. Who manages the money invested in the NPS?

PFRDA-registered Pension Fund Managers. As of now, 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. 

6. Can I change my investment choices?

You can change your investment choices once in a financial year for both Tier 1 and Tier 2 accounts. You can also change your scheme preference and pension fund managers, and your investment options (active and auto choices). You also have the option of selecting different pension fund managers and investment options for your NPS Tier 1 and Tier 2 account. 

7. What are the tax benefits available for NPS? 

Up to 10% of the salary (basic plus DA) – under Section 80CCD(1) of the Income Tax Act within the overall ceiling of ₹1.5 lakh allowed under Section 80C and Section 80CCE. The employer’s contribution to NPS is exempted under Section 80CCD (2) Individuals can claim an additional deduction of up to ₹50,000 under Section 80CCD (1B), which is in addition to ₹1.5 lakh permitted under Section 80C.

A self-employed person can also contribute 10 percent of his gross income under Section 80CCD (1). 

8. When can I withdraw money from NPS?

Even though you are expected to stay invested until retirement. At 60, you must use at least 40 percent of the corpus to buy an annuity income from a PFRDA-listed insurance company. You may even withdraw 60% of the corpus tax-free. You can defer withdrawing the lump sum amount in NPS until you are 70 years old. 

9. What if I want to take the money out before I am 60?

If you are getting out of the scheme before you are 60 years old, you can only withdraw 20% of the accumulated corpus in NPS. You must use 80 percent of the corpus to buy an annuity. 

10. What happens to the money if I discontinue the scheme?

Your account will be frozen. You can reactivate the account by making the minimum contribution required along with the penalty. If the subscriber dies before 60 years of age, the entire accumulated wealth would be paid to the nominee/legal heir of the subscriber. 

11. How do I withdraw the money from NPS?

Submit the withdrawal application to the POP along with relevant documents for authentication who will forward them to the Central Record-keeping Agency (CRA) and NSDL. CRA would register your claim and forward you the application form along with details of documents that need to be submitted. Upon completion of the necessary procedure, CRA processes the application and settles the account.

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