Launched initially to replace the conventional pension system for government employees who joined on or after January 1, 2004, the National Pension System or NPS (earlier New Pension Scheme) was made available for the common public between 18 and 60 years of age from May 2009. While the government employees under the contributory pension scheme compulsorily contribute 10 percent of their basic salary to the NPS fund and get the tax benefits u/s 80C, the average public may invest in an NPS Tier-I Account before March 31 and avail of tax deductions up to Rs 50,000 u/s 80CCD.
NPS Tier-I account is for retirement purposes and matures when the contributor retires at 60. At least 40 percent of the retirement corpus has to be invested in a pension plan of any IRDAI-governed insurance company. In comparison, the remaining 60 percent may be computed at the time of retirement or after attaining the age of 60 years. The entire computation part, which is 60 percent of the retirement corpus, is tax-free. Along with the Tier-I account, a person may also open the Tier-II account with no withdrawal restrictions.
Apart from the choice of accounts, investors may also choose an asset class they want to invest in. In Asset Class E, investments are made predominantly in equity market instruments; in Asset Class C, investments are made predominantly in fixed-income instruments other than Government Securities. In Asset Class G, investments are made predominantly in Government Securities. As the contributions made to NPS invested in company stocks, government bonds, and money market instruments by Pension Fund Managers (PFMs), the value of the retirement corpus would depend on the investments’ returns over the investment period. While PFMs manage the funds, NPS accounts are opened by other identities, known as Point of Sale (POS).
To make contributions and make partial withdrawals, etc., an investor has to approach the POS. NPS accounts may be opened offline or online. To open an account offline, a person must fill out forms and submit them to a POS, copies of necessary documents, and the account opening fee. A Permanent Retirement Account Number (PRAN) will be issued after verification of the documents. Once the PRAN is generated, the person may start contributing. Some POS also offer online services, through which NPS accounts may be opened quickly and conveniently. If you have a demat account, and the demat account provider is a POS, you will get a link to open an NPS account. Most banks also provide the facility to their net banking account holders.