National Pension Scheme (NPS): All about NPS – Introduction, Review and Benefits

Before going into NPS we must know the importance of retirement planning. When people retire there is sudden reduction (or stoppage) of income. We are at our peak earning capacity before pension and so is our lifestyle. This means zero or very low income post retirement can be a rude shock to many of us. Also medical expenses naturally increase with our age and the rate with which the medical costs are rising now, it’s imperative that we must save enough now. A pension can make up for loss of income/salary to a great extent if one starts early. So what is pension? A pension is a fund into which a sum of money is added during an employee's employment years, and from which payments are drawn to support the person's retirement from work in the form of periodic payments (source : wiki). This will ensure that people live with pride and without compromising on their standard of living and maintaining the same.

National Pension System (NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the Indian citizens. It aims to introduce pension reforms and to instill the habit of saving the citizens.

From 2004 to 2009, NPS was available for new government recruits (except armed forces) only. However from 1st May, 2009, all citizens including the unorganized sector workers can invest through NPS.

Who can join NPS?

NPS is applicable to all new recruits of Central / State Governments (except Armed Forces) and Central /state Autonomous Bodies joining service on or after 1st January 2004. Anyone who is not covered under above criterion can apply for NPS voluntarily. 

Overview of NPS

• Any individual citizen of India (both resident and Non-resident) in the age group of 18-65 years can join NPS. OCI/POI card holders and HUF aren’t allowed to invest
• It can be open only in individual capacity. Only one NPS account can be open per person. Click here to access registration form
• Subscriber can contribute a certain sum each month from month of opting for NPS 
• A unique Permanent Retirement Account Numbers (PRAN) is allocated to each subscriber at the time of their joining.
• Individual’s savings is pooled in selected pension fund. There are 3 funds choices currently and invest as per approved investment guidelines in the diversified portfolios comprising of government bonds, bills, corporate debentures, and shares.
• There are two accounts choices for investors,

• Tier I Account – Under this account, withdrawals are not allowed till 60 years. Government employee are covered under this by default
• Tier II Account – This works as a regular saving cum investment account and a subscriber is free to make withdrawals at any time. There is no tax benefits under this tier

• Subscribers need not change / worry about these accounts even after changing jobs etc.
• At the time of a normal exit from NPS, the subscribers can withdraw only 60%. 40% has to be used to purchase a life annuity from a PFRDA empanelled life insurance company.

The NPS contribution & interest earned are eligible for deduction while withdrawals are taxable.

List of empanelled Banks

• Allahabad Bank
• Andhra Bank
• Bank of India
• Bank of Maharashtra
• Corporation Bank
• Dena Bank
• HDFC Bank Limited
• IDBI Bank Limited
• Indian Bank
• Kotak Mahindra Bank Limited
• Oriental Bank of Commerce
• State Bank of Hyderabad
• State Bank of India
• State Bank of Patiala
• Syndicate Bank
• Tamil Nadu Mercantile Bank Ltd
• Karur Vysya Bank
• The Lakshmi Vilas Bank Limited
• The South Indian Bank Limited
• UCO Bank
• United Bank of India
• Vijaya Bank

Fund Managers

There are 7 pension fund managers currently namely,    

Pension fund by Birla Sunlife Insurance Co. Ltd

HDFC Pension Management Co. Ltd.

ICICI Prudential Pension Fund Management Co. Ltd.

Kotak Mahindra Pension Fund Ltd.

LIC PensionFund Ltd.

SBI Pension Funds Pvt. Ltd

UTI Retirement Solutions Ltd

Axis bank is the trustee bank while Stock Holding Corporation of India Ltd, functions as custodian for NPS

What is Permanent Retirement Account Number (PRAN)?

PRAN or Permanent Retirement Account Number is a must for NPS. It contains your PRAN number, name, father's name, photograph and signature/thumb impression.

How to apply for PRAN card?

Following are the ways to apply for PRAN card: 

1. Online:  Visit the official website of NSDL, download the form, fill it and submit it online. The nodal office generates the Permanent Retirement Account Number.

2. Offline: Download the form from NSDL website, fill it, attach photocopy of your KYC forms and send it to the address – NSDL e-Governance Infrastructure Limited, 1st Floor, Times Tower, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai – 400 013.

Investments

In NPS, subscribers can choose their own investment pattern. NPS offers multiple investment options to choose from. The NPS offers two patterns for investing subscriber’s money

a) Active choice:

Subscriber can actively decide as to how his NPS contribution is to be invested in the following four options: 

Asset Class E - Investments in predominantly equity market instruments.            
Asset Class C - investments in fixed income instruments other than Government securities.         
Asset Class G - investments in Government securities.

Asset class A: Investment in Alternative Investment Schemes including instrument like CMBS, MBS, REITS, AIFs, InvIts etc.  

         

Subscriber can choose to invest his/her entire pension wealth in C or G asset classes and up to a maximum of 75% in equity (Asset class E) and upto a maximum of 5% in asset class “A”.

 b) Auto Choice

In case subscriber doesn’t chose any option as mentioned above, money would be invested thru this option. In which where money will get invested in various type of schemes as per subscriber’s age. The funds available are,

(i) LC75 – Aggressive Life Cycle Fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 75% till age 35 and gradually reduces as per the age of the subscriber.

(ii) LC50- Moderate Life Cycle Fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 50% till age 35 and gradually reduces as per the age of the subscriber.

(iii) LC 25- Conservative life cycle fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 25% till age 35 and gradually reduces as per the age of the subscriber.

Moderate life Cycle Fund will be chosen by default if none is selected while investing.

Tax Implications

a) For Individuals who are employed

(a) Employee’s own contribution  - Eligible for tax deduction up to 10% of Salary (Basic + DA) under Section 80 CCD(1) within the overall ceiling of Rs. 1.50 lacs under Sec 80 CCE.

(b) Employer’s contribution   – The employee is eligible for tax deduction up to 10% of Salary (Basic + DA) contributed by employer under Sec 80 CCD(2) over and above the limit of Rs. 1.50 lacs provided under Sec 80 CCE.

b) For self-employed Individuals

Eligible for tax deduction up to 10 % of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.50 lacs under Sec 80 CCE.

Subscriber is allowed additional deduction up to Rs. 50,000/- of under sec. 80CCD 1(B)

Withdrawal / Exit

A.   Upon attainment of the age of 60 years:

If corpus is less than 2 lakhs : 100% withdrawal is permitted

If corpus is more than 100% : Maximum of 60% is allowed and at least 40% of the accumulated corpus must be utilized to purchase of annuity providing for monthly pension

However, the subscriber can defer the lump sum withdrawal till the age of 70 years. Subscriber has also got the option to continue contributing upto the age of 70 years.

B.     At any time before attaining the age of 60 years: (only after 10 years in NPS)

If corpus is less than 1 Lakh : 100% can be withdrawn

If corpus is more than 1 Lakh : At least 80% of the accumulated corpus must be utilized for purchase of annuity providing for monthly pension to the subscriber and the balance is paid as a lump sum payment to the subscriber.      

C.       Death of the subscriber:

In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS corpus wealth in lump sum.

Benefits of NPS

Some of the benefits of the National Pension System (NPS) are:

• Simple and low cost product.
• Easily portable
• It is regulated by Government
• Tax breaks for Individuals, Employees and Employers
• Better returns potential than comparable products

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