What is the NATIONAL PENSION SYSTEM (‘NPS’)?
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India. Well regulated environment [Pension Fund Regulatory and Development Authority (PFRDA) as regulator & Board of NPS Trust as Trustees] to oversee the overall function of pension funds to safeguard the interest of subscribers.
Introduced by the Government of India and regulated by the Pension Fund Regulatory & Development Authority (PFRDA) NPS works as a safe retirement fund. The Government authorized PFRDA vide Ministry of Finance, Department of Financial Services to extend NPS on a voluntary basis to all citizens of India including workers of the unorganized sector.
Under NPS following two types of accounts will be available:
- Tier-I account: One shall contribute savings for retirement into this (non-withdrawal account).
- Tier-II account*: This is a voluntary savings facility. One will be free to withdraw their savings from this account whenever one wishes to.
* Subscriber will be eligible for opening Tier – II account only if he has opened Tire – 1 account and it must be active.
Who can join?
A citizen of India, whether resident or non-resident, subject to the following conditions:
- Individual between 18 – 60 years of age as on the date of submission of his/her application to the POP/ POP-SP and complying with the prescribed KYC norms.
How to enroll in the NPS?
- To enroll in the NPS, one needs to submit the Composite Registration Form (UOS-S1) to the POPSP.
- NRIs should have an account with a bank based in India to open an account under NPS. The contributions made by the NRI would be subject to regulatory requirements as prescribed by RBI from time to time and FEMA requirements.
- After the account is opened, CRA shall mail a “Welcome Kit” containing the subscriber’s unique Permanent Retirement Account Number (PRAN) Card and the complete information provided by the subscriber in the Subscriber Registration form. This account number will be the primary means of identifying and operating the account.
- One will also receive a Telephone Password (TPIN) which can be used to access their account.
- One will also be provided an Internet Password (IPIN) for accessing their account on the CRA Website.
How much does a subscriber need to contribute?
An individual is required to make their first contribution at the time of applying for registration at any POP - SP. One is required to make contributions subject to the following conditions:
- Minimum amount per contribution - Rs 500
- Minimum contribution per year - Rs 6,000
- Minimum number of contributions -01 per year
- Over and above the mandated limit of a minimum of 1 contribution, one may decide on the frequency of the contributions across the year as per their convenience
Minimum contribution requirement:
- Minimum contribution at the time of account opening - Rs.1000/-
- Minimum amount per contribution - Rs.250/-
- Minimum Account Balance at the end of FY - Rs.2000/-
- Minimum number of contributions in a year - 01
Penalty of Rs.100/- to be levied on the subscriber for not maintaining the minimum account balance and /or not making the minimum number of contributions.
The subscriber can contribute the amount through local cheque or demand draft for initial Registration and ECS (Auto-Debit) only for subsequent subscriptions at KARVY POP-SP only.
No outstation cheques shall be accepted.s
What are the benefits of joining the NPS?
- It is voluntary- NPS is open to every Indian citizen. One can choose the amount you want to set aside and save every year.
- It is simple all one has to do is to open an account with any one of the POPs and get a PRAN.
- It is flexible- One can choose their own investment option and Pension Fund Manager and see your money grow.
- It is portable- One can operate their account from anywhere in the country, even if there is change in city, job or selected pension fund manager.
- It is regulated- NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
- Tax Benefits - It reduces your tax liability by availing the deductions u/s (80CCD) which will be upto Rs.1,50,000/- under section 80 CDD(1) and an additional Rs.50,000/- under section 80CCD (1B) as per assessment year (applicable from FY 2015-16/AY 2016-17). Employer's contribution to NPS made on behalf of employee(s) under Section 80CCD(2) of Income Tax Act, subject to 10% of the Salary (Basic + DA) shall be "allowed deduction in the computation of employee's total income". This is over and above the overall limit of Rs. 1.5 Lakh under Section 80C.
On attaining the Normal Retirement Age (NRA) of 60 years -
One will be required to compulsorily annuitize at least 40% of their pension wealth and the remaining 60% can be withdrawn as a lump sum or in a phased manner; in case, one opts for a phased withdrawal:
- Minimum 10%of the pension wealth should be withdrawn every year.
- Any amount lying to the credit at the age 70 should be compulsorily withdrawn in lump sum.
Withdraw any time before 60 years of age- In such a case, (i) one will have to compulsorily annuitize 80% of the accumulated pension wealth. The remaining 20% can be withdrawn as a lump sum. OR (ii) As per the new notification by PFRDA, A subscriber can withdraw up to 25% of the corpus provided, he/she has contributed in the scheme for a minimum of 10 years*
*maximum withdrawal allowed is three times, and only for the purpose of higher education and marriage of children, construction of house or specific alignment diseases etc.
What investment choice does the subscriber have?
The NPS offers two approaches to invest money:
One will have the option to actively decide as to how their NPS pension wealth is to be invested in the following three 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
Sum of all must equal 100%
One can choose to invest their pension wealth in C or G asset classes and up to a maximum of 50% in equity (Asset class E).
In case one decide to actively exercise their choice about investment options, he/ she shall be required to indicate their choice of Pension Fund Manager (PFM) from among the Pension Fund Managers (PFMs) appointed by PFRDA.
For those who do not have the required knowledge to manage their NPS investments. In such case their funds will be invested in accordance with the Auto Choice option.
One will, however, be required to indicate their choice of PFM. In this option, the investments will be made in a life- cycle fund with a pre-defined portfolio.
In case one does not indicate any choice of PFMs, your form shall not be accepted by the POP-SP. Investment Guidelines
The PF will manage 3 separate schemes, each investing in a different asset class, being:
Asset class E (equity market instruments) – in index funds that replicate the portfolio of either BSE Sensex or NSE Nifty.
Asset class G (Government Securities) – in Central Government bonds and State Government bonds.
Asset class C (credit risk bearing fixed income instruments) – This asset class will be invested in the following instruments:
- Liquid Funds of AMCs regulated by SEBI
- Fixed Deposits of scheduled commercial banks
- Debt securities with maturity of not less than three years tenure issued by Bodies corporate including scheduled commercial banks and public financial institutions.
- Credit Rated Public Financial Institutions/PSU Bonds
- Credit Rated Municipal Bonds/Infrastructure Bonds
NPS offers Indian citizens a low cost option for planning their retirement. A 0.25%* fee (based on assets under management) for managing your wealth, makes pension funds under NPS perhaps the world's lowest cost money managers.
Following are the charges under NPS:
||Method of Deduction
||Initial subscriber registration and contribution upload
||To be collected upfront
|Subsequent transaction cost
||0.25% of subscription or Rs. 20 whichever is higher (maximum Rs.25000/-)
||PRA opening charges
||Through Cancellation Of Units
|Annual PRA maintenance cost per account
|Charge per transaction
Charge for each subscriber)
||Initial Subscriber Registration
And Contribution Upload
||Rs. 100 + ad valorem transaction charge of 0.25% of initial contribution amount- subject to min. Rs. 20 and max. of Rs.25000
||To Be Collected
|Any Subsequent Transactions involving contribution
||0.25% of initial contribution amount-subject to min. Rs. 20 and max. of Rs.25000
||Any Subsequent Transactions not involving Contribution2
||Through NAV deduction
|Per transaction emanating from a RBI location
|Per transaction emanating from a non-RBI location4
|Custodian 5(On asset value in custody)
||Asset Servicing Charges
||0.0075% p.a for Electronic segment & 0.05% p.a. for Physical segment
||Through NAV deduction
||Investment Management Fee3
||Through NAV deduction
*service tax and other levies, as applicable; will be levied as per the existing tax laws. There are no additional CRA charges for the maintenance of tier -ii account.
1 The number of accounts in CRA reaches 30 lakh the service charges, exclusive of Service Tax and other taxes as applicable, will be reduced further to Rs 250 (Rupees two hundred and fifty only) for annual PRA maintenance per account and Rs. 4 (Rupees four only) for charges per transaction. CRA's charge for maintenance of your permanent retirement would include charges for maintenance of electronic information of the balances in your PRA, for Incorporating changes to PRA details received by the CRA in electronic form, for sending annual account information once a year in printed form etc.
2 These include Change in subscriber details.; Change of investment scheme/fund manager; Regular subscriber’s contribution; Processing of withdrawal request; Processing of request for subscriber shifting; Issuance of printed Account statement; Any other subscriber services as may be prescribed by PFRDA
3 The Investment Management Fee is inclusive of all transaction related charges such as brokerage, transaction cost etc. except custodian charges and applicable taxes. The Investment Management Fee is calculated on the average monthly assets managed by the pension fund.
4 Trustee Bank charges are not charged to subscriber directly. Transaction refers to the entire chain of activities starting from receipt of electronic instructions/ receipt of physical instrument to transfer of funds to the designated PFMs. On the outflow side, it would include all activities leading to credit of beneficiary account.
5 Charges for Demat/Remat, Receipt of shares & SEBI charges are extra.
Key features of Tier-II account:
- No additional CRA charges will be levied for account opening and annual maintenance in respect of Tier II. However, CRA will charge separately for each transaction in Tier II, the charges being identical to the transaction charge structure in Tier I.
- There will be no limits on the number of withdrawals from Tier II account.
- There will be facility for separate nomination and scheme preference in Tier II.
- The subscriber would have the same choice of PFMs and schemes as in the case of Tier I account in the unorganized sector.
- Contributions can be made through any POP/POP-SP.
- There will be facility of one-way transfer of savings from Tier II to Tier I but funds cannot be transferred from Tier I to Tier II.
- Bank details will be mandatory for opening a Tier II account.
- No separate KYC for opening Tier II account will be required; the only requirement is a pre-existing Tier I account.
- This 80 CCD (2) is not applicable to non - salaried class individuals/professionals who are self employed/employees who do not come through CORPORATE MODEL
- For other individuals tax benefit is available only under 80C up to a limit of Rs 1.5 lakh in a cumulated/consolidated way along with rest of the 80C permitted investments.
- 80 CCD (2) can effectively be used by corporate as an EMPLOYEE RETENTION WEAPON going forward.
- Withdrawals from NPS on maturity are tax free up to 40% of the total corpus accumulated.