What is New Pension Scheme (NPS)?
The New Pension Scheme or NPS is a voluntary contributory pension scheme introduced by the Central Government. The NPS is administered by Pension Fund Regulatory and Development Authority (PFRDA). Under the NPS, individuals can open a personal retirement account and can accumulate a pension corpus during their work life to meet financial needs post retirement. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made. When the person retires, he will be able to use these savings to take care of the needs and expenses of his family during old age. The subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a life insurance company.
New pension scheme is a defined contribution scheme started by Government of India for the central government employees excepting the Armed forces with effect from 01 January ’2004; gradually state governments also adopted this system. Defined contribution means that unlike the old pension system, here the employee and employer (government) will make a defined contribution/deposit in the scheme (which is 10% of basic+DA) and at the time of retirement the pension/annuity can be purchased with the accumulated corpus in this account.
With effect from 1st may’2009, NPS is available to all citizens of India and NRIs, who can contribute on voluntary basis.
Salient Features of NPS
1- Open to all Citizens of India and NRI’s falling between the age group of 18 & 60.
2- Minimum annual contribution to NPS (Tier 1) is Rs 6000 per annum and can be started with as low as Rs 500 (Minimum contribution amount)
3- Low Fund Management Charges (less that 0.01%)
4- Withdrawal on maturity at the age of 60 years post which one can withdraw 60% of the corpus as lump sum or in trenches of minimum of 10% each and compulsorily buy annuities of the remaining 40%.
However, for special requirements a onetime withdrawal or liquidity of 20% is allowed before maturity
Who can subscribe in NPS?
Any citizen in the age group of 18-60 years [as on the date of submission of his / her application to the Point Of Presence (POP) or POP Service Providers (POP-SP)] can join.
All records will be kept by Central Record-keeping Agency (CRA). Central authorities and fund manager will be providing performance reports and NAVs (Net Asset value) regularly, so investor can track and invest accordingly. In Starting, NAVs will be declared once every year and switching fund manager will be allowed only once a year.
What is Point Of Presence (POP) or POP Service Providers (POP-SP)?
PFRDA has appointed Point Of Presence (POP) to provided various facilities (like opening Permanent Retirement Account, contributing to NPS etc). POPs’ shall provide the services under NPS through their network of branches called POP Service Providers (POP-SP).
Under NPS, two types of accounts are available –
1. Tier I account – This account non-with draw able account. You shall contribute your savings for retirement into this.
2. Tier II account – This account has the voluntary savings facility. You will be free to withdraw your savings/redeem your Tier II units from this PRAN account whenever you wish. To open this account an active Tier I account is a prerequisite.
How NPS Funds are managed?
PFRDA has appointed following Pension Fund Managers (PFM) to invest and manage funds.
1. ICICI Prudential Pension Funds Management Co. Limited
2. SBI Pension Fund Pvt. Limited
3. UTI Retirement Solutions Limited
4. IDFC Pension Fund Management Co. Limited
5. Kotak Mahindra Pension Fund Limited
6. Reliance Capital Pension Fund Limited
7. LIC Pension Fund Limited,
Approaches for Investment
The investor then has to choose an approach for investment between active choice (managed by PF) – individual funds (E, C and G Asset classes) and auto choice – lifecycle fund:
1- Asset class E (Equity market instruments) – This asset class
will be invested in index funds that replicate the portfolio of either BSE Sensitive
index or NSE Nifty 50 index.
2- Asset class G (Government Securities) – This asset class will be invested in
central government bonds and state government bonds
3- Asset class C (Credit risk bearing fixed income instruments) – This asset class will be invested in liquid funds of Mutual Funds, credit rated debt securities. This includes rated bonds/securities of Public Financial Institutions and Public sector companies, rated municipal
bodies/infrastructure bonds and bonds of all firms (including PSU/PSE).
How should I select my investment option?
You can choose the investment mix between equity or E (high risk but high returns), mainly fixed income instruments or C (that come with medium risk and returns) and pure fixed investment products or G (which offer low returns but have very low risks associated with them). Equity investment is capped at 50 per cent.
What are the charges for NPS?
- For account opening and issuance of PRAN: Rs. 50
- Annual Maintenance Charge: Rs.280 per year
- Initial subscriber registration charge: Rs.100
- Minimum Contribution per year: Rs.6000
- Minimum Ammount per Contribution: Rs.500
- No Maximum Contribution
- No Periodicity Prescribed
- Transaction charges and contribution upload: 0.25% of the amount, subscribed by the NPS subscriber, subject to minimum of Rs.20 and a maximum of Rs. 25000.
- Fund Management Charge: 0.0009% per year on the fund value.
- Fund Switch Charges: Rs.20
- Any other transaction not involving a contribution from subscriber: Rs.20
Each NPS subscriber will be given a unique Permanent Retirement Account Number (PRAN), with the help of which the subscriber can maintain the same account irrespective of his change of job or residence anywhere in the country.
How it works?
NPS works like a mutual fund scheme. You deposit your money into pension fund account and the designated pension fund manager will be entrusted with the task of managing it. You will be allotted units against your investment amount and see it growing with the daily declared Net Asset Value (NAV). You can check your corpus deposited into your account and its value at that particular date
The investor can switch from one Pension Fund to another Pension Fund. The investor can change his/her scheme preference once a year any time during the year.
How much can I invest?
There is no investment ceiling. But the minimum investment limit has been fixed at Rs 500 a month or Rs 6,000 annually. Subscribers are required to contribute at least once a quarter but there is no ceiling on how many times you invest during the year.
What is the penalty for failure to make the minimum payment?
You will have to bear a penalty of Rs 100 per year of default and will need to pay it with the minimum amount to reactivate the account. Also, dormant accounts will be closed when the account value falls to zero.
What are the Tax benefits with respect to NPS?
At present, NPS allows a tax deduction under section 80CCD (2) which gives the subscriber an opportunity to get a tax deduction beyond the section 80C and 80CCF. It has an EET status.
With implementation of the new direct tax code, the NPS is expected to get EEE status, which will make it an even more attractive proposition.
When can the investor withdraw funds?
The sum that can be withdrawn from the pensionable corpus is subject to the age of the investor at the time of withdrawal.
At the time of withdrawal, balance amount will have to be used to purchase an annuity from any IRDA – regulated life insurance company. The withdrawal can be a lump sum or in parts as per the choice of the investor. After 70 years of age the account is closed and the sum is transferred to the investors account.
In case of death, option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum.
What happens if I relocate to another city?
The PRAN remains the same and you can access a toll-free number (1-800-222080). The details of your PRAN and the statement of transactions will be available on the CRA website (www.npscra.nsdl.co.in).
How can I exit the scheme?
The normal retirement age has been fixed at 60 years. At 60, you will be required to use at least 40 per cent of your accumulated savings to buy a life annuity from an insurance company. A phased withdrawal is also allowed but the lump sum benefit has to be availed of before you turn 70 years.
For those looking to exit before turning 60, there is an option to withdraw 20 per cent of the accumulated savings but buy an annuity with the remaining 80 per cent.
NPS Documents and Forms:
New Pension Scheme (NPS) – Offer Document