What is National Pension System (NPS) Scheme?

NPS stands for “National Pension System”, which is a pension scheme regulated by Pension Fund Regulatory and Development Authority. National Pension System (NPS) Scheme is a flexible way of saving for your retirement. This allows you to invest in equities and debt instruments during your working life to save money for the retired life. National Pension System (NPS) scheme is having the lowest charges which will ensure better returns to the subscriber in the long run.

new pension system nps What is National Pension System (NPS) Scheme?

Features of National Pension System (NPS) Scheme

On joining National Pension System (NPS), you will get a unique Permanent Retirement Account Number (PRAN). This account number will remain the same for the rest of your life.

Tier-I Pension Account: This is the main account, where you have to save money for your retirement. There are restrictions on withdrawal from this account.

Tier-II Savings Account: This is a voluntary savings facility. You can withdraw your savings from this account whenever you wish.

Investment options in National Pension System (NPS) Scheme

In National Pension System (NPS), you can decide the investment pattern to a limited extent. There are two approaches to decide your investment pattern:

  1. Active Choice (Individual Funds)             2. Auto Choice (Life Cycle Fund)

A.   Active Choice (Individual Funds)

In this approach, you will have the option to decide as to how your National Pension System (NPS) contribution is to be invested. There are 3 investment options as given below:

  1. Option E: Investments in predominantly equity market instruments. It will be risky, but rewarding in the long term. To minimise risk, the investments will be limited to shares in indices like Sensex and Nifty.
  2. Option C: Investments in predominantly fixed income instruments like corporate debt. So the return and risk attached will be medium.
  3. Option G: Investments in purely fixed income instruments like Government securities. This offers low risk and low returns.

You can decide investment pattern in the above 3 options as per your choice. You can invest 100% in Option C or G, if you choose to. The only restriction in this is that, the investment in Option E is capped at 50%. You have the option of changing the option also, if you think so.

B.   Auto Choice (Life Cycle Fund)

If you are not comfortable in deciding your investment pattern, then you can opt for Auto Choice option in National Pension System (NPS).

In this option, the investments will be made in a lifecycle fund. Your investment will be spread across all the 3 options discussed above. Your age will be the criteria to decide the percentage allocation to each of these options.

Up to the age of 35, 50% of your investment will be in Option E, 30% in Option C and 20% in Option G. From age 36, the allocation in Option E will be reduced by 2% every year, and that in Option C will be reduced by 1% every year and that in Option G will be increased by 3% every year, till it reaches 10% in Option E, 10% in Option C and 80% in Option G at the age of 55. By doing so, the Fund Manager ensures that your amount is protected from any last minute volatility, when you are nearing retirement. This portfolio rebalancing is ideal for retirement planning.

Who are the stakeholders in National Pension System (NPS) Scheme?

  1. PFRDA: This is a body set up by the Government to develop and regulate the pension business in India.
  2. NPS Trust:  This trust is created under the Indian Trusts Act, which is responsible for taking care of the funds under the NPS.
  3. Trustee Bank: The Trustee Bank shall facilitate fund transfers across various entities of the NPS system. Axis Bank is the Trustee Bank for NPS.
  4. Central Recordkeeping Agency (CRA): The recordkeeping, administration and customer service are handled by the National Securities Depository Limited (NSDL), which is the CRA for the NPS.
  5. Pension Fund Managers (PFMs): There are six Pension Funds (PFs) appointed by PFRDA to manage savings under the NPS. You can select the Fund Manager of your choice, as per their performance.
  6. Point of Presence (POP): POPs are the first points of interaction of the subscriber with the NPS. The authorised branches of a POP, called Point of Presence Service Providers (POP-SPs), will act as collection points and extend customer service to subscribers.
  7. Annuity Service Providers (ASPs): ASPs would be responsible for delivering a regular monthly pension to you after your exit from the NPS.

How to join in National Pension System (NPS) Scheme?

Most of the leading banks are acting as POPs. Axis Bank, SBI and Associates, ICICI Bank and Union Bank of India are aggressive in this. To enrol in the National Pension System (NPS) Scheme, submit the Registration Form (UOS-S1) to the POP-SP of your choice. The Form is available from POP-SPs and the PFRDA website (www.pfrda.org.in).  You have to make your first contribution at the time of applying. After your account is opened, CRA shall mail you the Welcome Kit containing your Permanent Retirement Account Number (PRAN). You will also be given an Internet Password (IPIN) for accessing your account on the CRA Website (www.npscra.nsdl.co.in).

Other conditions in National Pension System (NPS) Scheme

Minimum amount per contribution – Rs. 500

Minimum contribution per year – Rs. 6,000

You have to make at least one contribution in a year. Otherwise, you have to pay penalty of Rs. 100/- per year to regularise the account.  There is no maximum limit fixed in a year. You can contribute as much as you want.

How to withdraw money from National Pension System (NPS) Scheme?

If you want to withdraw before the age of 60, then you can withdraw only 20% of the accumulation in lump sum and the balance has to be utilised to buy an annuity from any of the approved annuity provider. But after the age of 60, you can withdraw up to 60% of the accumulation in lump sum and the rest 40% by way of annuities.

In case of death of the subscriber at any time, the full accumulation will be paid to the nominee in lump sum.

There are no restrictions for withdrawals from the Tier-2 account of the subscriber.

Charge Structure in National Pension System (NPS) Scheme

NPS is having the lowest cost among such investment options now. The annual fund management charge is 0.25% only which is very low compared to even mutual funds.

Other than this, there is an annual maintenance charge of Rs. 350/- to the CRA and transaction charges like Rs. 40/- per transaction.

Tax benefits in National Pension System (NPS) Scheme

The amount paid to National Pension System (NPS) will qualify for deduction under 80CCD. Along with 80C and 80CCC, the limit for this is capped at Rs. 1 Lakh.

But there is an additional tax benefit in NPS. Under Section 80 CCD(2), if an employer contributes up to 10% of the salary to the NPS account of the employee, this amount gets tax exemption of up to Rs. 1 Lakh. This is over and above the Rs. 1 Lakh tax deduction under Section 80CCD. The employer also gets tax benefit under Section 36 I (IV) A for his contribution.

As of now, the annuity from NPS Scheme is taxable like any other annuity. There is a proposal to make it tax free in the Direct Tax Code (DTC).

National Pension System (NPS) Scheme – A boon to risk averse investors

NPS Scheme with limited exposure to equity will help risk averse investors to create a retirement corpus. Capping the equity exposure at 50%, NPS will ensure that the risk is minimised. By opting for Lifecycle Fund, you can still reduce the risk of equity in NPS Scheme.

For more details on National Pension System (NPS Scheme), please click on the link

http://www.pfrda.org.in/writereaddata/linkimages/NEW%20WELCOME%20KIT396945283.pdf

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About Melvin Joseph

SEBI Registered Investment Adviser, SEBI Registration Number : INA000000342. Certified Financial Planner from the Financial Planning Standards Board India (FPSB) and a Fellow of Insurance Institute of India (FIII). I have done Post Graduate Diploma in Financial Advising from Indian Institute of Banking and Finance.
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One Response

  1. Great article, Melvin! Understood NPS clearly for the first time!!

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