National Pension Scheme
National Pension Scheme (NPS) is a Government scheme for all citizens of India looking for a safe and secure investment plan with good returns to create a corpus for their retirement. It is a pension plan which aims at providing financial security and stability during old age when people do not have a regular source of income to rely on. Since it is a pension plan, it is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS was initially introduced for all government employees (except armed forces). With effect from 1 st May, 2009, NPS was extended to all citizens of the country including the workers of the unorganised sector on voluntary basis. Under the NPS, an individual’s savings is contributed to a pension fund. These pension funds are managed by PFRDA regulated Fund Managers who invest the pension money into a diverse portfolio of varied products in line with the regulatory norms. These funds grow and accumulate long term returns over the years. The NPS invests in the following products:
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Class A – Alternative investment (REITS)
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Class E – Equity
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Class C – Fixed income instruments
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Class G – Government Securities
NPS is open to investment for everyone, including
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Central Government Employees
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State Government Employees
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Corporates – at corporate level or employee level
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Individuals
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Unorganized Sector Workers
NPS has a well-defined financial infrastructure which is standardized and organised. One of the features of NPS is the Permanent retirement Account Number, or PRAN. This is a unique account number provided to the subscriber, which he can use and access all throughout his life for all pension investments; and can be accessed from anywhere in India.
PRAN provides access to two accounts under the NPS:
Tier 1 account: This is the primary NPS account which provides for pension and receives tax benefits as well. This is a non withdraw-able account. It can be held by an individual, corporate, or government sector unit.
Tier 2 account: This is different from the Tier 1 account, and is held purely for investment purpose. It is a voluntary account. There is no minimum or maximum investment limits; however, there are no tax benefits or pension facility either.
Salient Features of NPS:
Infrastructure of NPS
The following entities ensure the smooth functioning of the NPS:
Pension Fund Regulatory and Development Authority (PFRDA): PFRDA is an autonomous entity set up under the Government of India and is mainly responsible for developing regulating the pension market of India.
Points of Presence: Points of Presence (POPs) are the first contact points with the NPS provider. The POPs have authorized branches as their service providers who can help the subscribers to open the NPS account and also provide customer service to them. There are 58 institutions authorized by PFRDA including public and private banks, financial institutions and Postal Departments as Points of Presence (POPs) for opening the NPS.
Central Record keeping Agency (CRA):Maintaining of records of all NPS subscribers and providing various customer service functions to them is done by the National Securities Depository Limited (NSDL), which is the CRA for NPS.
Annuity Service Providers (ASPs): ASPs provide annuities for the subscribers of NPS after exiting the scheme. These would deliver a regular monthly pension to the investor from the maturity corpus of NPS.
Eligibility: All citizens of India between 18 years and 65 years of age can invest in this scheme.
NPS investment limit: One has to invest minimum ₹500 in NPS. There is no upper limit to for investment. However, in Tier-1 account, one has to invest a minimum of 1,000 in a financial year.
Registration charges: Registration charges are ₹500 for NPS account.
Number of contributions: Subscribers have to make at least one contribution every year.
Changes in scheme and fund manager: Subscribers can choose to change their scheme or fund manager if they are not happy with their performance. This option is available for both Tier-1 and Tier-2 accounts.
Benefits of NPS
There are many benefits of investing in NPS. Some are listed below:
Simplicity: NPS is fairly simple to invest in. The subscriber simply has to open an account with an authorized branch and secure a Permanent Retirement Account Number (PRAN).
Transparency: The contributions made by subscribers into the NPS are invested in various pension fund schemes. The performance of these schemes, NAV, portfolio holdings, charges, etc. are all available on the NPS website on a daily basis.
Portability: Employees investing in NPS are allotted a unique and separate PRAN which will remain the same for life even if he changes his employer or office.
Regulation: NPS comes under the regulatory purview of PFRDA, which ensures transparency in investment norms by regularly monitoring and reviewing the fund managers throughNPS Trust.
Tax Benefit: As per new rules, 60% of the maturity corpus of NPS is completely tax- free. The rest 40% has to be invested in Annuity income in the subsequent years will be taxable, based on the income tax slab of the investor. However, the total limit of tax exemption on NPS investment u/s 80CCD 1B is ₹50,000, which is over and above the ₹1,50,000 limit under 80C, making the total to ₹2,00,000.
Charges under NPS
NPS is a relatively low-cost investment for the subscriber. The costs are segregated into three parts:
Upfront costs – These include registration charges (fixed plus contribution based) & request to change the fund manager. In case of online transactions, bank charges commission on every contribution. This can be eliminated by using Aadhaar to open the account yourself online.
Fund related costs – These include Pension Fund Management charges, charges related to investing in underlying mutual funds, Stock holding Corporation charges (custodian for safekeeping NPS securities) and NPS Trust charges. These charges are reflected in the NAV of the pension fund.
Charges for cancelling units – These include account opening charges, maintenance charges and transaction-based charges which are recovered by the CRA by cancelling the units. Even POPs recover a persistency charge by cancellation of units if the account is minimum 6 months old.