How do NPS accounts work?

1. How do NPS accountswork? • The National Pension System (NPS)is a pension scheme that has been launched by the Government of India. The scheme helps you create a corpus for retirement and then avail lifelong incomes from the corpus accumulated. Investments into the NPS pension plan are voluntary and if you invest in the NPS scheme, you can avail tax benefits under Section 80C as well as under Section 80 CCD(1B). • The NPS Pension Plan allows you two types of investment accounts for investing your money. Let’s understand these NPS account features and delve into how these accounts work– • NPS accountfeatures • There are two types of accounts when you choose to invest in the NPS pension plan. The first one is the Tier I Account which is mandatory and the other one is the Tier II Account which is voluntary. You would have to open a Tier I Account before you would be allowed to open a Tier IIAccount. • The minimum amount of investment that is required to open a Tier I Account is INR 500 while for Tier II Account it is INR 250. Moreover, in one financial year, you should invest at least INR 1000 in Tier I Account to keep itactive. • Withdrawals are not allowed from Tier I Account except in special circumstances which include marriage, buying a house, medical emergency, unemployment for two consecutive months, etc. Tier II Account, however, is very flexible. You can invest and withdraw from the account whenever you want to without anyrestrictions. • How do NPS accountsinvest? • The NPS pension plan is a market-linked saving scheme wherein you can create a retirement corpus by availing market-linked returns. The NPS account allows you a choice of two investment strategies to invest and grow your money. These strategies are as follows– • Active choice ofinvestment– • This investment strategy allows you to manage your investments yourself. There are four types of investment funds under the strategy and you can choose to invest in one or more of the available funds. The funds are as follows - • Asset Class A which invests in alternate investment funds like REITS, MBS, AIFs,etc. • Asset class C which invests in fixed income securities barring Governmentsecurities • Asset Class E which invests at least 50% of the portfolio instocks • Asset class G which invests only in Governmentsecurities. • If you choose Asset Class E, you would be allowed to invest up to 75% of your investment in that fund. The rest can be invested in Asset Classes C and G. The maximum investment in Asset Class A should be up to 5%. If you invest in Asset Class C or G, there would be no restriction on the proportion of investment in either or each of these funds. Moreover, if you have chosen equity investments, as you age your equity exposure would reduce so that the returns are protected from marketvolatility.

2. Auto choice ofinvestment • Under this strategy, the investment is allocated automatically based on your age and the risk profile that you choose. There are three risk profile options of Aggressive, Moderate andConservative. • After you choose the risk profile, the allocation would be done in the following way provided your age is up to 35years– Moreover, with advancing age, equity exposure would be reduced under all the risk profiles. He reduced allocation would be reallocated between Asset Classes C and G in specifiedratios. You have the flexibility to choose the investment strategy as well as the investment fund. You can also switch between the chosen strategies and investment funds as NPS allows switching everyyear. So, understand NPS account features and how the scheme grows your investments into a considerable retirement corpus so that you can achieve financial independence when youretire.