NPS – It’s working and lock-in period

The National Pension System (NPS) helps you plan for a secured retired life by giving you lifelong annuities. It is a market-linked investment avenue that lets you accumulate a considerable retirement corpus through regular investments into the scheme. Though the scheme has a long term investment horizon, it allows withdrawals during the investment tenure. Let’s have a look at the working of the NPS scheme and the lock-in period applicable –

How does NPS work?

The working of the NPS scheme can be explained in the following steps –

1. Step 1 – Investment

You can invest in NPS online or offline through your bank if it is a registered institution offering NPS investments, or through the NPS website itself. When you invest in NPS, you would be given two account options – Tier I and Tier II. Tier I is a compulsory account while Tier II is voluntary. You can invest in Tier-II account only if you have opened a Tier I Account. To open the Tier I Account, the minimum investment required is INR 500 and thereafter in a financial year you should invest at least INR 1000. For Tier II the minimum amount is INR 1000 and subsequent investments should be INR 250 or above.

1. Step 2 – Choosing the investment strategy and funds

NPS gives you two types of investment strategies – Active Choice and Auto Choice. Under Active Choice, you get four fund options, Asset Class A, C, E, and G, to choose to invest your money. Under Auto Choice, however, you have to choose your risk profile – Aggressive, Moderate, or Conservative. Based on the risk profile chosen, the money is allocated between Asset Classes C, E, and G in a predefined ratio.

1. Step 3 – Return for NPS

All the fund options available under the NPS scheme invest in the financial market. The return for NPS is, therefore, not guaranteed and depends on the valuation of the fund portfolio. Asset Class E is an equity fund where risk is high and returns are attractive. Asset Classes C and G are debt funds with low risks and stable returns. You should, therefore, assess your investment preference and then choose the fund needed.

1. Step 4 – Maturity

The NPS scheme matures when you reach 60 years of age. You can also defer the maturity by another 10 years and avail the benefit at 70 years of age. On maturity, you can withdraw up to 60% of the accumulated corpus in a lump sum which would be a tax-free benefit in your hand. The remaining 40% of the corpus would be used to pay you lifelong annuities. You can choose the pension fund manager from whom you want annuity payments. Also, there are different annuity options available under the plan and you can choose the annuity option as per your requirement.

The above-mentioned steps show the working of the NPS scheme, right from the time you invest in NPS online till maturity. Now let’s have a look at the lock-in period of the scheme.

Lock-in period of NPS

The Lock-in period under the NPS scheme depends on the type of withdrawal you want to do. You can either choose to do partial withdrawals or exit the scheme before maturity. Here are the lock-in rules for both cases –

1. Partial withdrawals from NPS account

Tier I Account of NPS scheme does not allow flexible partial withdrawals. Partial withdrawals from Tier I Account are allowed only on certain specific instances, marriage, medical emergency, buying a house, etc. In such cases you can withdraw from Tier I Account partially only after 3 years of opening the NPS account. Each partial withdrawal would be limited at 25% of the account balance. Moreover, a maximum of three withdrawals is allowed during the entire tenure of the scheme. Tier II Account, however, allows flexible withdrawals whenever you want.

1. Pre-mature exit

You can exit from the NPS scheme before completion of the tenure. This is called premature exit and this is allowed only after 10 years of opening the NPS Account. Upon premature exit, 20% of the accumulated corpus can be withdrawn in a lump sum while the remaining 80% of the corpus would be used to pay annuities.

So, before you invest in NPS online, under how the scheme works, return for NPS and the lock-in rules so that you can maintain and operate your NPS account properly.

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