What is National Pension Scheme (NPS)?

The National Pension System (NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. Main aim of NPS is to bring reforms in the field of Pension for the citizens of India by encouraging people to save for the retirement.

NPS offers following important features to help subscriber save for retirement:

·         The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber's life. This unique PRAN can be used from any location in India.

PRAN will provide access to two personal accounts:

·         Tier I Account: This is a non-withdrawable account meant for savings for retirement.

·         Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.

Process to open NPS account:

NPS is distributed through authorized entities called Points of Presence (POP’s) and almost all the banks (both private and public sector) are enrolled to act as Point of Presence (POP) under NPS apart from several other financial institutions. To invest in NPS, you will be required to open a NPS account through the Point of Presence (POP) and who will assist the subscriber in opening the account including the filling up of necessary forms, providing the information about NPS and any other relevant information in this regard.

What is POP?

Points of Presence (POPs) are the first points of interaction of the NPS subscriber with the NPS architecture. The authorized branches of a POP, called Point of Presence Service Providers (POPSPs), will act as collection points and extend a number of customer services to NPS subscribers including requests for withdrawal from NPS.

How are the funds contributed by the subscribers managed under NPS?

The funds contributed by the Subscribers are invested by the PFRDA registered Pension Fund Managers (PFM’s) as per the investment guidelines provided by PFRDA.

The contributions from subscribers are done in a mix of investment instruments like Government securities, Corporate bonds and equities. This being a good mix of debt and equity, investments are very secure.

At present, Subscriber has option to select any one of the following 8 pension funds:

· ICICI Prudential Pension Fund

· LIC Pension Fund

· Kotak Mahindra Pension Fund

· Reliance Capital Pension Fund

· SBI Pension Fund

· UTI Retirement Solutions Pension Fund

· HDFC Pension Management Company

Since registration of PFMs is an ongoing process, this list will be updated from time to time.

What are the different Fund Management Schemes available to the subscriber?

The NPS offers two approaches to invest subscriber’s money:

· Active choice – Here the individual would decide on the asset classes in which the contributed funds are to be invested and their percentages (Asset class E(maximum of 50%), Asset Class C, and Asset Class G )

· Auto choice - Lifecycle Fund- This is the default option under NPS and wherein the management of investment of funds is done automatically based on the age profile of the subscriber.

What income tax reliefs are available to the individuals contributing to NPS?

Tax benefit to employee: Individuals who are employed and contributing to NPS would enjoy tax benefits on their own contributions as well as their employer’s contribution as under: -

(a) Employee’s own contribution - Eligible for tax deduction up to 10% of Salary (Basic + DA) under Section 80 C, which has a maximum limit of Rs. 1.5 lakh.

(b) Employer’s contribution – The employee is eligible for tax deduction up to 10% of Salary (Basic + DA) contributed by employer under Sec 80 CCC(2). This gives additional tax benefit on investments of up to Rs 50,000 a year,over and above Rs. 1.5 lakh a year under section 80C, for financial year 2015-16.

Tax benefit for self-employed: Eligible for tax deduction up to 10 % of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1 lakh under Sec 80 CCE.

Withdrawal Norms

There is a requirement for subscribers who leave the scheme before retirement (or age 60, whichever is the earlier) to invest 80% of their accumulated savings in a life annuity from a life insurance company approved by Insurance Regulatory and Development Authority (IRDA). The remaining 20% is eligible for withdrawal as a lump sum.

On retirement, at age 60, subscribers are required to invest at least 40% of their pension fund in an annuity and the remaining 60% can be redeemed as a lump sum. In the case of government employees, the annuity provides for pension for the lifetime of the employee and his dependent parents and spouse at the time of retirement.

Subscribers may remain in the scheme after their 60th birthday for the purpose of receiving interest on their account, but may not make further contributions after that date. If a subscriber does not exit the system on or before their 70th birthday, the account is closed and the benefits are transferred to the subscriber as a lump sum. If a subscriber dies, the nominee has the option to receive the account total as a lump sum.

What is an annuity?

An annuity is a financial instrument which provides for a regular payment of a certain amount of money on monthly/quarterly/annual basis for the chosen period for a given purchase price or pension wealth. In simple terms it is a financial instrument which offers monthly/quarterly/annual pension at a specified rate for the period you chose.

Pros and Cons of NPS

Pros of National Pension System

·         Additional tax-saving of Rs 50,000 above the 80C limit of Rs. 1.5 lakh.

·         Apart from ELSS, only second tax saving option having Equity component.

·         Flexible options to choose allocation percentage in Equity and Debt (To a certain extent)

·         Multiple options to choose / change pension fund managers

·         No upper cap of investment

·         Investment option available to NRIs also.

Cons of National Pension System

·         Mandatory to buy annuity at maturity.

·         High documentation required at the time of opening

·         No fixed/guaranteed interest rate of returns

·         Minimum contribution of Rs 6,000 annually to keep account active

Most important question

If your annual income is in highest tax bracket of 30%, I would suggest you to invest in NPS and claim the additional Rs 50000 in the tax rebate. This will help you to save your taxes significantly.

If your annual income is Rs 10 lakh per annum, I would suggest you to give this scheme a miss and directly invest in Mutual funds or Share market to generate a better return.