The National Pension System (NPS) is a pension cum investment scheme launched by the Government of India to provide old age security to Citizens of India. The Scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
It is open to all residents, as well as NRIs (with some restrictions) and seeks to provide market-based returns over the period of investment and an annuity from the time the investment period ends. It is a low-cost scheme.
The primary account is called the Tier I account. An optional, and related, Tier II account can also be opened, with some differences.
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Tier 1
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Tier 2
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|---|---|---|
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Mandatory
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Yes
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Yes
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Contribution
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Minimum amount per contribution - Rs. 500
Minimum contribution per Financial Year - Rs. 1,000 Minimum number of contributions in a Financial Year – one |
Minimum amount per contribution - Rs. 250
Not mandatory to contribute every year |
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Withdrawal
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Restricted to death and reaching retirement age
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Flexible withdrawal
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Further:
– There is no additional cost for maintaining a Tier II account
– Tier II amounts can be invested in the same manner as Tier I
– It can only be maintained along with a Tier I account
Investment and Exit are the two distinct parts of the scheme.
Investment
Individual savings are pooled in to a pension fund which are invested by PFRDA regulated professional fund managers as per the approved investment guidelines in diversified portfolios comprising Government Bonds, Bills, Corporate Debentures and Shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made. Investors can choose the investment scheme and also switch from one manager to another.
Pension Fund Manager (PFM) under NPS:
Subscriber is mandatorily required to choose one PFM from the available PFMs.
1. Birla Sunlife Pension Management Limited
2. HDFC Pension Management Company Limited
3. ICICI Prudential Pension Funds Management Company Limited
4. Kotak Mahindra Pension Fund Limited
5. LIC Pension Fund Limited
6. Reliance Capital Pension Fund Limited
7. SBI Pension Funds Private Limited
8. UTI Retirement Solutions Limited
The contribution remitted in Subscriber’s account is passed on to the PFMs as selected by the Subscriber at the time of registration (or changed subsequently). The PFMs invest the money and declare Net Asset Value (NAV) at the end of each business day. Accordingly, based on the NAV, units are credited in the Subscriber’s account. The present value of the investment is arrived at by multiplying the units held with the NAV.
The return under NPS is market driven. Hence, there is no guaranteed/defined amount of return. The returns generated through investments are accumulated for the pension corpus and are not distributed by way of dividend or bonus.
Investment Option:
Investors can choose where funds are invested or opt for the Auto choice, under which funds are automatically allocated amongst asset classes in a pre-defined matrix, based on the age of the subscriber.
Active choice:
Unlike traditional investment products, NPS offers you with the flexibility to design your own portfolio. Depending on your risk appetite, you can design your portfolio by allocating Funds
amongst available four asset classes. This is called Active Choice. Following are the four asset classes available under Active choice:
- Equity – Asset Class E
- Corporate Debt – Asset Class C
- Government Securities – Asset Class G
- Alternative Investment Funds or AIF – Asset Class A
Subscriber can select multiple Asset Class under a single PFM as mentioned below:
- Upto 50 years of age, the maximum permitted Equity Investment is 75% of the total asset allocation.
- From 51 years and above, maximum permitted Equity Investment will be as per an equity allocation matrix that reduces with age, going to 50% for 60 years and above.
- Percentage contribution value cannot exceed 5% for Alternative Investment Funds.
- The total allocation across E, C, G and A asset classes must be equal to 100%.
Auto Choice:
At times designing your portfolio can be a little delicate and time consuming. NPS gives you
the flexibility to opt for a dynamic and automatic allocation of your portfolio in case you do
not want to exercise an Active choice. This option is called the Auto choice.
In Auto choice, your money will be invested in asset classes – E, C and G – in defined
proportions based on your age. As individual’s age increases, exposure to Equity and
Corporate Debt is gradually reduced and that in Government Securities is increased.
Depending upon the risk appetite of subscriber, there are three different options available
within Auto Choice-Aggressive, Moderate and Conservative.
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Aggressive (LC-75) – Maximum Equity exposure is 75% up to the age of 35
Moderate (LC-50) – Maximum Equity exposure is 50% up to the age of 35
Conservative (LC – 25) – Maximum Equity exposure is 25% up to the age of 35
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Scheme
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SBIP F
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LICP F
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UTIRS L
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ICICIP F
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KotakP F
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HDFC PF
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Birla PF
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|---|---|---|---|---|---|---|---|
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A
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8.93
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7.92
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6.12
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6.90
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6.52
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8.72
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6.03
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E
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10.80
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10.89
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10.72
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11.43
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11.45
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11.79
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10.95
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C
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8.37
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8.36
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7.91
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8.29
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7.50
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8.67
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8.41
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G
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8.65
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9.35
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8.50
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8.63
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8.80
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8.93
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8.86
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The investment can be considered as a very-low-risk investment as it is offered by a government agency, which equates to sovereign risk. However, certain asset classes such as equity could result in sub-optimal outcomes as they are market dependent and not committed returns.
Exit
On retirement or exit from the scheme, the Corpus is made available to the Subscriber with
the mandate that some portion of the Corpus must be invested in to Annuity to provide a
monthly pension post-retirement or exit from the scheme. At least 40% of Tier I balance
should be so invested. The balance can be withdrawn as a lump sum without tax implication.
It can also be invested in the annuity purchase along with the mandatory 40%.
Tier II balance can be fully withdrawn. It can also be transferred to Tier I account at any point
during the currency of the account or at the time of exit, without incurring any exit load.
Annuity purchase at the time of exit can be done out of a set of choices offered by the PFMs.
Once purchased, providers cannot be changed once the free look-in period is over. Annuity
returns can vary from one provider to another. The choices available:
Annuity for Life with Return of Purchase Price
Subscriber will get annuity for life time and on death of the Subscriber, payment of annuity
ceases & 100% of the purchase price will be returned to the nominee(s).
Annuity for Life without Return of Purchase Price
Subscriber will get annuity for life time and on death of the Subscriber, payment of annuity
ceases and no further amount will be payable.
Joint Life Annuity with Return of Purchase Price
Subscriber will get annuity for life time and on death of the Subscriber, annuity will be
payable to Spouse for life time. On death of the Spouse, payment of annuity ceases and
100% of the purchase price will be returned to the nominee(s).
Joint Life Annuity without Return of Purchase Price
Subscriber will get annuity for life time and on death of the Subscriber, annuity will be
payable to Spouse for life time. On death of the Spouse, payment of annuity ceases and no
further amount will be payable.
Family Income Option with Return of Purchase Price
Subscriber will get annuity for life time and on death of the Subscriber, annuity will be
payable to spouse of the Subscriber (if any) for life time. On death of Spouse, to dependent
mother and then to dependent father of the Subscriber. On death of the last annuitant,
payment of annuity ceases and 100% of the purchase price will be returned to the surviving
children of the Subscriber and in absence of children, the legal heirs of the subscriber as
applicable.
Tax benefits
(Available only for contributions to Tier I accounts)
Contributions eligible for tax benefit under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.5 lac under Sec 80C.
An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B).
Subscriber can partially withdraw from NPS Tier I account for specified purposes. Amount received from partial withdrawal are tax exempt u/s 10 (12B) of Income Tax Act.
Amount invested in purchase of Annuity, is fully exempt from tax. However, annuity income that you receive in the subsequent years will be subject to income tax.
Upto 60% of the total corpus withdrawn in lump sum at the time of exit is exempt from tax. For example: If total corpus at exit is 10 lakhs, then 60% of the total corpus i.e. 6 lakhs, you can withdraw without paying any tax. So, if you use 60% of NPS corpus for lump sum withdrawal and remaining 40% for annuity purchase, you do not pay any tax at that time. Only the annuity income that you receive in the subsequent years will be subject to income tax as per the applicable tax slab.
Liquidity
Subscribers can withdraw certain parts of the investment starting 3 years after joining. No
penalty on withdrawal.
Competition
Non-organized workers, including small business owners, do not have access to any
organized form of pension. This addresses that gap.
Investment options as well as Annuity options made available under the NPS scheme, are also available through the same, and other, private players without going through the scheme.
The benefit of NPS over private players:
Investment side- Better returns, as the expense ratio of these funds is lower than private
Website
https://enps.nsdl.com/eNPS/NationalPensionSystem.html
Recommendation
Should be subscribed by everyone who is eligible.
