How to Invest in NPS?
Your retirement is a time for rest. You have put your hard yards in, and now is the time to sit back and enjoy the rest of your life.
But unfortunately, many people fail to lead a peaceful post-retirement life because of lack of proper retirement funds. Hence, a retirement fund becomes a necessity. It will ensure you have financial backing even when your income stops, and you can live your life the way you want without having to depend on anyone financially.
The government has introduced several schemes to encourage citizens to create retirement or pension corpus. The national pension system (NPS) is one such example.
But unlike other pension schemes, NPS comes with many advanced benefits. To begin with, the money you invest in NPS is invested in a fund/portfolio with an equity presence. This could improve your chances of capital appreciation. Moreover, NPS also gives plenty of options in choosing a fund according to your investment horizon and taste.
Wondering how to invest in a national pension scheme to reap all the benefits? Read on to find out.
Types of NPS Accounts to Invest In
Two categories of accounts are offered under NPS. Let us learn more about each and see which one is suited for you and how to invest in national pension scheme tier I and tier II schemes.
Tier I Account
- Tier I is the mandatory account. It is the default account that you get when you start your NPS policy. You can make regular contributions to this account without any upper cap. Most of the benefits of the scheme are exclusive to tier I accounts.
- At 60, you will be able to withdraw a maximum of 60% of your entire corpus. The rest of it gets converted to an annuity. This way, you will receive a pension for the rest of your life.
- NPS comes under section 80C of the income tax act. Hence, contributions towards the account are eligible for tax deductions up to Rs. 2 lakhs per annum including the benefits of Rs.50,000 can be claimed under Section 80CCD (1B).
- Above all this, NPS tier I corpus withdrawal of up to 60% is entirely exempt from tax, making it an extremely tax-friendly option.
- The minimum investment needed to open an NPS tier I account is Rs. 500. You need to invest at least Rs. 1000 per year to keep the account active.
Tier 2 Account
- This account is voluntary. It is only available to all the NPS tier I users who want a secondary investment account with flexible withdrawal and exit rules. Although it works similarly to your NPS Tier I account, there are a few differences to consider
- Since Tier 2 Account is not mandatory, the NPS tier II account doesn’t come with any tax benefits for non-government employees.
- There are no withdrawal limits set on this account. You can invest in and withdraw from an NPS tier II account anytime.
- The minimum initial investment needed to open a tier II account is Rs.1000. Since the tier I account already requires you to submit all the KYC documents, you need not resubmit them when you open a tier II account.
- Also, you can choose not to make any contribution in a year to the Tier II account.
Steps for the Investment in Both Tier I and Tier II Account
How to Invest in NPS Tier I?
- Ensure these documents are kept at your disposal when opening the account to make the process easier.
- Aadhaar Card
- Netbanking details
- Passport size photograph (size 4-12 kb)
- Scanned image of your signature
- PAN Card
- Link your Aadhar and PAN card with your mobile number for receiving OTPs.
- Visit the official NPS website. Alternatively, you may visit Point of Presence-Service Providers websites that provide NPS services, but be sure to choose a trusted entity.
- On the website, you will have the option for registration. Click on the same and select the ‘individual’ option.
- On the new page that appears, enter your Aadhaar and PAN card details. An OTP will be sent to your registered mobile number. Once you receive the OTP, enter the same and click on ‘continue’.
- You will be asked to fill in your details. Ensure to fill the same carefully. Post that, enter the nominee details.
- Choose any of the pension funds, and then you will be asked to choose the asset allocation mode. There are two choices – active and auto. The active option gives you a better say over where your money will get invested, while in auto mode, the system decides based on factors like age, investment amount, etc.; choose according to your preferences and goals.
- Then you will be asked to upload a cancelled cheque.
- Once all the details are filled in, you must make the initial payment of Rs.500.
- As a final step, you will receive your permanent retirement account number (PRAN) and payment receipt.
- First, you will have to find a point of presence that provides NPS services. Reach the POP with a copy of all the above documents in the online process. Keep the original with you for verification as well.
- Collect the application form and fill the same using a black pen.
- Once you submit the form, you will get the receipt along with a 17-digit receipt number. After verification of your application, you will receive further details. The application part of the process is over.
How to Invest in an NPS Tier 2 Account
Once you have the tier I account ready, you may also open a tier II account to begin investing in it.
You may visit the NPS portal and click on ‘Tier II activation.’ Fill in the details, including your PRAN number, Date of Birth, PAN Card Number, and Captcha code. Once your PRAN is verified you may start investing by adding a minimum of Rs.1000 into your account.
Alternatively, you may visit a point of presence (POP) once you have the tier I account ready. You must fill out the form with relevant details and invest the minimum amount.
How much Minimum and Maximum Contribution do I Make?
The minimal initial contribution needed is Rs.500 for a tier I account and Rs.1000 for a tier II account. This is made at the time of registration.
Tier I requires a minimum amount per contribution of Rs.500 and a minimum yearly contribution of Rs.1000. You should at least contribute once a year to keep the account active.
In the case of a tier II account, the minimum amount per contribution is Rs.250. However, there are no minimum balance requirements.
NPS is a one-of-its-kind pension scheme that invests your retirement corpus in securities, including equities, to give you maximum benefits. The NPS tier I account is best suited to build this corpus. NPS tier II accounts become a wise choice if you also want to use the investment benefits of NPS for your other investments. Ensure you always have an investment goal to get the best out of your NPS investment.
Is NPS worth investing in?
NPS is one of the most beneficial retirement schemes. What makes it different from other retirement or pension schemes is that NPS also invests in equities. But if you are a risk-averse investor, you can choose low-equity options. Moreover, it comes with many tax benefits, making it even more beneficial. However, investing in NPS should be based on your investment goals.
Is it mandatory to deposit every year in NPS?
For Tier I account accounts, a minimum contribution of Rs.1000 will keep the account active. There are no such requirements for a tier II account. However, it is wise to invest regularly to ensure you create a considerable corpus.
Which fund manager is best for NPS?
You should choose a fund manager or fund house according to your preferences. For this, you may research more about each fund manager and come to a conclusion based on your preferences.
Can I withdraw money from NPS?
You can withdraw from the NPS tier I account after you turn 60. At this point, you can withdraw up to 60% of your corpus, which will be tax-exempt. For tier II accounts, there are no such restrictions. Also, Partial withdrawal is available subject to certain conditions.
Is NPS risk-free?
Compared to other similar schemes, NPS comes with a higher risk since there is market linkage. But it means the return potential is also higher.