NPS: Invest regularly to turn savings into sizeable kitty

If you are serious about building a substantial corpus for your retirement, then you surely need to know more about National Pension System (NPS). A low-cost retirement solution, NPS can turn our retirement savings into a sizeable kitty.

It is rightly said, “If you have money, it will serve you and work for you well”. Retirement is one of the most important events of life for which we need to save regularly. From both personal and financial perspective, realising a comfortable retirement is an incredibly extensive process that takes sensible planning and years of persistence.

So, if you start saving in investment products such as National Pension System from youth till retirement, then you will get a regular monthly income when you stop working. Even Rs. 100 per month, saved from the age of 30 years onwards would yield an estimated corpus of Rs.1,49,035 @ 8% rate of return, at the age of 60 years.

If rate of return is more, the corpus will grow more. The earlier you join, the returns on your savings will be higher. But to get considerable amount of savings, you need to invest regularly in your NPS account till your retirement. If you stop contributing to your pension account, you need to pay a penalty. The below article provides information on what NPS is and what penalties you will have to pay on violating NPS rules.

NPS: A basic idea

NPS was initially for government employees, and was later extended to all citizens of India. NPS is a scheme introduced by government of India to secure your future after retirement. Regulated by PFRDA (Pension Fund Regulatory and Development Authority), NPS is a pension plan where you can invest during your working years and withdraw when you retire.

Times gone by

NPS was launched by government of India for central and state government employees in 2004, as they shifted from a ‘defined benefit system’ to a ‘defined contribution system’ under the pension system in India. This is mandatory for all post 2004 government employees. NPS was then made available to every Indian citizen from 1 April 2009 on a voluntary basis. 

Investment options

NPS provides a subscriber access to two personal accounts: Tier-I pension account & Tier-II savings account. Any individual between 18-60 years—who is citizen of India—can enroll in NPS. The retirement age for both the Tier-I & Tier-II accounts is 60 years. Tier-I account does not allow you to make any withdrawals before 60 years. Tier-II account allows you to withdrawal anytime.

In Tier-I account, minimum amount to be contributed is Rs. 500 per month and minimum contribution should be Rs. 6,000 each year. For Tier-II account, the minimum amount to be maintained is Rs. 2,000 and no restrictions or charges on deposits and withdrawals. Tier-II account can be opened only if you have an active Tier-I account. You can choose your asset allocation or a fund manager if you are not satisfied by the performance. If you are unable to invest less than Rs. 6000 in any year, then a penalty charge of Rs. 100 is levied on the account.

Asset classes

Asset Class E (Equity market instruments) will invest in index funds such as BSE Sensitive and NSE Nifty 50 Index. The investment can be made up to 50% of the amount accumulated in the account.

Asset Class G will invest in central government and state government bonds. The investment can be made up to 100% of the amount accumulated in the account.

Asset Class C includes Corporate Debt, Liquid Funds of AMCs regulated by SEBI, fixed deposits of scheduled commercial banks, debt securities and credit rated infrastructure bonds. The investment can be made up to 100% of the amount accumulated in the account.

Penalty

Each year an NPS subscriber has to invest at least Rs. 6,000 in his pension account. Hence if one misses to pay that money or pays less than the Rs. 6,000, then your account will be freeze by PFRDA. No transactions can be made in the account till the minimum contribution is paid along with a penalty of Rs.100 per year of no contributions. When the account is frozen the money will stay invested until the fund value does not reach zero. The account will then close and you will have to reactivate it.

You will need to pay a penalty of Rs.100 even in the case of tier-II account if you skip the yearly contribution or not maintain the minimum balance of Rs.2,000.