NPS (National Pension Scheme) - Everything you need to know - YouTube

Hello friends. Today we will talk about a topic that most of us may not know yet.

This is a service that most of us use for claiming tax deductions

But it is a very important tool for financial stability in our old age life.

Yes, I am talking about the National Pension Scheme.

In this video, we will talk about What is NPS? What are its different types?

How does it work? How to withdraw? What are its benefits?

How is it different from other solutions in the market?

But before moving ahead, hit the subscribe button and like the video if you haven't already.

Because we post quality content on personal finance and investing every week to help you create wealth.

Now, let's come back to today's topic.

Let's understand What is NPS?

In 1952, EPFs were started for employees.

In 1968, PPFs were started for the public.

In 2004, NPS was started for government employees.

In 2009, it was opened for everyone i.e, any Indian citizen can open their account here.

NPS is a voluntary defined contribution system that is a retirement scheme where you can make retirement funds.

And also, can make pension for every month.

What is a voluntary defined contribution?

It is the funds invested by the individual themselves.

It can also be contributed by the employer in the case of salaried individuals.

It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

The shop owners, salaried persons, corporate people, or in government, all can open accounts in this scheme.

This was open for all from 2009 so NRIs and OCs can also open accounts here.

Now let's understand How does it work?

Other financial products like sales, operations, fund management, depository are managed by 1 company or entity

But NPS has a structure where each step of the process is independent of each other.

This is done mainly to provide users with the ability to mix and match and pick the best-suited option for themselves.

This is also done to reduce instances of overdependence on any single provider and to prevent misselling as well.

The NPS architecture consists of

1. The NPS Trust which safeguards user interests

2. Central Recordkeeping Agencies (CRAs) which maintain the data and records

3. Point of Presence (POPs) acts as the middleman between the user and the NPS

4. Pension Fund Manager (PFM) for managing the pension fund

5. Annuity is responsible for managing the annuity to provide the pension amount after retirement

Let's understand in detail.

1st comes to trust then CRA, there are 2 privately owned CRAs in India.

They are K-Fin Technology & NSDL.

Then comes POP, Point of Presence.

commercial banks, brokers, and stock holding corporations can act as the POP.

The NPS has 7 pension fund manager options available today like

Aditya Birla SunLife Pension Management

HDFC Pension Management

ICICI Prudential Pension Funds Management

Kotak Mahindra Pension Fund

LIC Pension Fund

SBI Pension Funds

UTI Retirement Solutions

Out of all these 7 options, the SBI Pension Funds is the largest PFM in terms of AUM today.

It has a 53% market share.

Govt Employees do not get the right to choose their PFMs

All their NPS contributions are evenly distributed to the 3 PFMs which are:

LIC Pension Fund, SBI Pension Fund, and UTI Retirement Solutions.

The user is provided with 2 choices after the selection of PFM which are Active Choice and Auto Choice.

In Active Choice, the user can specify the allocations to different asset classes to the PFM with max allocation to equity class as per their age.

For Auto Choice, the investments are made into a lifecycle fund with 3 different options as per risk level

They are Aggressive, Moderate, and Conservative funds.

The asset allocation changes in time with the user’s age and the equity allocation is going down.

The max equity allocation for the 3 types of funds

If your Age is 35 or below, then in Aggressive Fund, Max Equity Allocation can be 75%

in Moderate Fund, it can be 50% in Conservative Fund, it can be 25%

If your Age is 55 or below, then in Aggressive Fund, Max Equity Allocation can be 15%

in Moderate Fund, it can be 10% in Conservative Fund, it can be 5%

After completion of 60 years of age, you can withdraw 60% of the corpus amount.

The rest 40% goes under the annuity where you can select any of the 13 annuity providers on the screen.

HDFC Life LIC

ICICI Prudential Life SBI Life, etc

Now let's understand What are the different types of NPS accounts?

NPS is available in 2 different formats- the Individual account as All Citizens Account and the Corporate NPS account.

As the names suggest, in the Individual account the individual user makes contributions, choices for service providers like POP, PFM, Fund

In the Corporate NPS account, both the individual user and their employer can make contributions.

Any individual can open up two sub-accounts under the same Permanent Retirement Account Number (PRAN).

These subaccounts are called tiers in NPS.

Tier I is known as the main pension account.

Under this account, tax deduction can be claimed on contributions of up to Rs 1.5 Lac under Section 80 C

And tax deduction can be claimed on an additional Rs 50,000 under Section 80CCD

The total taxable income deduction that a user can claim in a year comes out to Rs 2 Lacs.

Withdrawal from this account is restricted and subject to numerous terms and conditions.

Tier II is the additional account where the user can invest additional funds without the restrictions of the Tier I account.

This account does not provide the benefit of tax deduction available

This account is only available to users with pre-existing Tier I accounts

For govt employees, there is a provision to get a maximum of Rs 1.5 Lacs

Now let us understand the Conditions for withdrawal from an NPS account.

We all know that this scheme is made for our retirement plan and stability.

Users can make any withdrawals from a Tier I or main pension account after the age of 60.

There can be no withdrawals before it.

And we don't have to pay tax on it till it matures, i.e, it is tax-free till maturity.

A user can only withdraw 60% of the sum total on maturity and not the total amount.

And have to put the remaining 40% in an annuity

The gains from this annuity will however be subject to taxes.

Then there are no restrictions on withdrawal.

Now let's understand the benefits of NPS.

1. Regulated and transparent norms with NPS Trust protecting the investors

2. The flexibility of choosing whichever service provider is best for each individual

3. NPS also allows for the transfer of external retirement funds provided by employers into the NPS

4. NPS accounts are very portable with the account and PRAN staying the same for a user no matter where they move to

5. Voluntary scheme for retirement solutions for every Indian citizen

6. Tax benefits provided in both contributing to and redeeming the pension fund

Let's see the Differences between NPS and other Savings vehicles.

The major difference between NPS and other savings vehicles like ELSS, PPF, and FD is the lock-in period.

I.e, when can we withdraw, and whats its maturity period

The lock-in period for the main NPS account is till retirement at 60 years of age

3 years in ELSS 15 years in PPF 10 days to 10 years in FD

In terms of returns, NPS aims to provide a return profile of 8-10% CAGR

It is more than PPF and FDs but is subject to market-related risks like ELSS.

But as compared to ELSS which have a higher allocation to the equity segment and are thus riskier than NPS

NPS and ELSS provide us with expected returns and they depend on market-related risks.

But FD and PPF provided were guaranteed returns. But they are less than NPS and ELSS.

Hope you found this video helpful and learned something from it.

If yes, then like this video.

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This is Nidhi Nagar, Signing off. Thank you.