How to invest money in a National Pension Scheme

National Pension Scheme

The National Pension Scheme is one of the most popular retirement investment plans. If you are planning to retire or looking for a suitable plan other than a fixed deposit scheme then this might be an ideal financial tool to be considered. This scheme is backed up by the government of India and it will allow you to spend money across different classes of assets as per your own choice to build a retirement corpus. This pension scheme is regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). Any one of the ages 18 to 65 can be a subscriber of this scheme. It is essential to understand the working of the investment process in the National Pension Scheme before choosing this as your investment option.

Understanding the types of accounts 

In the National Pension Scheme, there are two types of accounts that you can invest in. Tier I and tier II accounts. 

Tier-I Accounts

This is a default account and is mandatory for everyone who opts for NPS. Tier I is the retirement account. When you open a tier-I account then a twelve-digit permanent retirement account number popularly called PRAN will be allotted to you. To open a tier-I account the minimum amount of contribution that has to be made is INR 1500. Further to keep the account active you will need to contribute INR 1000 annually. There is no cap on investment in tier I account. The money invested here will be locked out until the subscriber turns 60 and after that, they can withdraw 60% of the corpus sum. The remaining 40% will be used to buy an annuity plan from an insurance company that will pay the subscriber monthly. The subscriber here can gain a tax exemption under the Income Tax Act, 1961. 

Tier-II Accounts

This account is a voluntary addition to the former. It can only be opened when you have a tier I account and by paying a minimum deposit of INR 1000. However, it is important to note here that the investments made in tier II accounts do not enjoy any tax exemption.

Opening an NPS Account

After understanding the two types of accounts and their features it is essential to understand that how can you open an NPS account. This process can be done online or offline depending upon your convenience. You may require documents like your Adhaar Card, PAN card, passport size photographs, scanned images of your signature, net banking details, etc. to open an NPS account.

Determining the asset allocation during the opening of an NPS account 

Now to invest in a National Pension Scheme, it is important to have an NPS account. Once that is done then the next step is to choose an asset allocation based on which your money would be invested. The asset choices that you will get will be in between equity, government securities, corporate debt, and al; alternative investment funds. Further, there are two different options available for asset allocation.

1. Active Asset Allocation

If an investor wants to decide his or her mix of assets then they should go for the active choice. However, it is important to note here that the maximum one can allocate for equities is restricted to 75% and once the age of the subscriber crosses 50 then the percentage for equity investment will come down. This is mainly because equities are volatile as they are subject to market conditions. 

2. Auto Asset Allocation 

When this asset allocation method is chosen then the subscriber gets to option to allocate in three lifecycle funds wherein the equities are caped up to the age of 35 years. There is the aggressive lifecycle fund with the maximum exposure equity of 75%, then the moderate life cycle fund with the equity exposure of 50%, and the conservative life cycle fund with the equity exposure of 25%. 

In conclusion, we can say that the National Pension Scheme is a voluntary long-term investment plan for retirement and a social security initiative by the Indian government. It also offers seven Registered Pension Funds under NSP that you can choose from. They can also be changed twice a year if you want to. There are multiple other options and schemes such as the fixed deposits schemes available in the investment market. However. It is essential to make an informed decision and choose the right one for yourself.

There are multiple retirement investment schemes available in the market. The National Pension Scheme is one of them. It is backed up by the Indian government and is open to all the citizens of India. To take the benefit of this scheme and invest money in the same one has to open an NPS account. There are two types of account offered which include the Tier I and Tier II account. Once the account is opened then the subscriber to the scheme has to choose an asset allocation system from the auto and active asset allocation. This is how the process of investment in an NPS scheme begins. The subscriber can withdraw 60% of the amount after reaching the age of 60 and the rest 40% is received in the form of monthly pension.