Understanding NPS Returns: A Guide to Maximizing Your Pension

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Financial security is a fundamental goal for everyone. While maintaining a stable financial position is essential, it is equally important to have a financial plan for the future, especially for the "retirement" stage. It is necessary to explore various ways to secure a reliable income for developing a solid financial plan for retirement.

So, to make things easier, the Indian Government introduced the National Pension System (NPS) in 2004. It was created for working professionals and was available to the general public in 2009. This post shall explore the concept of NPS Returns in detail.

The Return on National Pension System: An Overview

All the contributions made in the NPS account get allocated to four asset classes, which are:

• Alternative Assets
• Equity
• Government Bonds
• Corporate Bonds

The proportion is based on the asset allocation of NPS, which you have chosen. As you plan for your retirement, it is important to carefully consider your asset allocation, as it can significantly affect your returns.

The returns on NPS rely heavily on the performance of the assets you have invested in. Hence, under the NPS, you receive market returns. You can contribute to equities and other assets.

All these asset classes will provide you with outstanding returns. Furthermore, you must start investing early. It's because when you start early, you receive a much higher pension amount and retirement corpus.

What are the Returns in Tier I and Tier II NPS Accounts?

In this section, you will gain detailed information about the returns on the Tier 1 and Tier 2 accounts of NPS. Here the returns are detailed for both accounts separately:

1. Tier I NPS Account

This is the main account where people, salaried or self-employed, contribute funds for retirement. In this account, you cannot withdraw funds till you are 60 years old.

Through this account, you can contribute to different asset classes like government securities, corporate bonds, and equity. The Tier I account returns rely heavily on how well all these investments perform.

However, Pension Funds offer a return of 7.91% on corporate bonds, 9.40% on government bonds, 8.55% on alternative assets and 32.96% on equity. All these returns are for the first year.

2. Tier II NPS Account

Under NPS, this is an optional account slightly different from the Tier I account. You can only contribute to this account if you have the Tier I NPS account. It's similar to a mutual fund and has no lock-in duration.

In other words, you can take out funds from this account whenever required, but it will not offer you tax-related advantages. Just like the Tier I account, the returns on this NPS account will depend on how well all the asset classes are performing.

Pension Funds will provide you with a 32.98% return on equity, 7.84% on corporate bonds, and 9.24% on government bonds. All these are Year 1 returns on the Tier II NPS account.

Understanding the Tax on the NPS Returns

The returns on the NPS account will stay completely free of tax till maturity. This will keep the marked-linked profits from getting taxed. The information below will give you a proper understanding:

Once you reach 60 years, the NPS funds will mature. You can then take out around 60% of the corpus as SWP or lump sum. This is completely free of tax under Section 10(12A). However, the remaining 40% of the funds can be utilised to buy annuities, which will also be tax-free under Section 80CCD(5).

Now, let's take a look at a small example:

Consider the overall corpus as Rs. 20,00,000 when you turn 60. You can take out Rs. 12,00,000 as a SWP or lump sum. You can invest the remaining Rs. 8,00,000 in the annuity plan to generate the pension income.

Remember, all the annuity payouts will be added to the income and taxed based on the slab rate.

How Do You Open an NPS Account at ICICI Bank?

Open NPS Account with iMobile App:

To open your NPS account with ICICI Bank, follow the steps below:

• Log in to the ICICI Bank iMobile Pay app.
• Once logged in, Navigate to the "Invest and Insure" section.
• Find the ‘Instant NPS’ feature and Select the ‘NPS’ option.
• Fill in all the required details such as your investment amount, personal information, and nominee details.
• After verifying the information, securely submit your application through the app.

Contributing to Your NPS Account via Internet Banking

For existing ICICI Bank customers, contributing to their NPS account is straightforward through Net Banking. Log in to your ICICI Bank Net Banking account and access the "Investments and Insurance" section. From there, proceed to the National Pension System portal and fill in the mandatory details for your contribution. Ensure to submit your contribution securely through Net Banking.

It's crucial to make your first contribution online within 45 days of PRAN generation to prevent your account from being frozen, ensuring a seamless initiation of your NPS investment with ICICI Bank.

Conclusion

The National Pension System (NPS) is a tax-friendly investment option ideal for all working professionals. You can contribute funds to both Tier I and Tier II accounts to ensure financial security during your retirement years and get attractive market linked returns. Well-known and reputed banks, such as ICICI Bank, offer the NPS account option to all their customers. They also provide excellent features like; Real time portfolio tracking, Open NPS in just 1 minute. One-click contribution and download statement anytime. If you are considering the NPS, it is advisable to consult a banking professional for more information.

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