National Pension System (NPS) is a pension plan where you can invest during your working years and withdraw when you retire
Retirement planning involves time and skill. Unfortunately, many of us hate finance and remain ignorant towards it. At the same time, we also remain ignorant towards our retirement planning. Some of us constantly delay our decision to make investments—saying there is a lot of time for our retirement. Most of us do make investment. However, we invest randomly in different investment options and prefer easy exit. Hardly anyone plans for retirement systematically. We need to understand that for retirement planning we have to focus on financial products where we can invest for long term and not touch our investment till we retire.
If you are serious about building a substantial corpus for your retirement, then you surely need to know more about National Pension System (NPS). A low-cost retirement solution, NPS can turn our retirement savings into a sizeable kitty.
Vikash Raj, chief executive officer, IDFC Pension Fund, said, “Though the revised guidelines have proposed to increase the management fees of NPS, the fact remains that it is the best long-term savings option in the market for everybody including those who don’t want to know anything about stocks, mutual funds and asset allocation.”
A slight idea
NPS is a scheme introduced by government of India to secure your future after retirement. NPS is a pension plan where you can invest during your working years and withdraw when you retire. The scheme is the lowest-cost retirement solution in the world with most generous tax benefits.
NPS is portable. You can operate your account from anywhere in the country, even if you change your city or job. NPS is safe. It is regulated by PFRDA (Pension Fund Regulatory and Development Authority), with transparent investment norms and regular performance review of fund managers by NPS Trust. NPS allows you to view your NPS account statement 24x7 on Central Recordkeeping Agency. All transactions can be tracked online through CRA system. Employee can check fund and contribution status through CRA website.
Pravin Chordia, product manager-financial products division, India Infoline, “Tax benefit up to Rs. 1 lakh is available under section 80 CCD. Under the revised draft of the DTC (Direct Taxes Code), NPS is proposed to be brought under the EEE (exempt-exempt-exempt) method of taxation. This means that investors get a tax exemption at all three stages of investment, appreciation and withdrawal.”
Times gone by
NPS was launched by government of India for central and state government employees in 2004, as they shifted from a ‘defined benefit system’ to a ‘defined contribution system’ under the pension system in India. This is mandatory for all post 2004 government employees. NPS was then made available to every Indian citizen from 1 April 2009 on a voluntary basis.
NPS provides a subscriber access to two personal accounts: Tier-I pension account & Tier-II savings account. Any individual between 18-60 years—who is citizen of India—can enroll in NPS. The retirement age for both the Tier-I & Tier-II accounts is 60 years. Tier-I account does not allow you to make any withdrawals before 60 years. Tier-II account allows you to withdrawal anytime.
In Tier-I account, minimum amount to be contributed is Rs. 500 and minimum contribution each year should be Rs. 6,000. For Tier-II account, the minimum amount to be maintained is Rs. 2,000 and no restrictions or charges on deposits and withdrawals. Tier-II account can be opened only if you have an active Tier-I account. You can choose your asset allocation or a fund manager if you are not satisfied by the performance. If you are unable to invest less than Rs. 6000 in any year, then a penalty charge of Rs. 100 is levied on the account.
Asset Class E (Equity market instruments) will invest in index funds such as BSE Sensitive and NSE Nifty 50 Index. The investment can be made up to 50% of the amount accumulated in the account.
Asset Class G will invest in central government and state government bonds. The investment can be made up to 100% of the amount accumulated in the account.
Asset Class C includes Corporate Debt, Liquid Funds of AMCs regulated by SEBI, fixed deposits of scheduled commercial banks, debt securities and credit rated infrastructure bonds. The investment can be made up to 100% of the amount accumulated in the account.
Flexibility is there
NPS gives you the option to choose how your money is invested. The Auto Choice option helps you to divide your money among equity, government debt and corporate debt-based on proportions defined by PFRDA. Funds are managed by professional fund managers appointed by PFRDA. These proportions change as your age increases. The Auto Choice option is for passive investors those usually who don’t know much about stocks, mutual funds and asset allocation, added Mr Raj.
If you want to manage your account actively, then Active Choice option is perfect for you. You get to specify your own asset allocation in one of the three ways. You can invest in Asset Class E that is up to 50% in equity and remaining in corporate or government debt or both. If you are not an aggressive investor, then you choose Asset Class G (100% in government debt) or Asset Class C (100% in corporate debt).
The initial registration and account opening charges are Rs. 100 and Rs. 50 respectively, annual maintenance charge Rs. 350 and for each transaction there is a charge of Rs. 5. The account opening charges are charged only once at the time of the registration and annual maintenance charges are charged every year. The product does not have any hidden charge, elaborated Mr Chordia.
How to exit
At the end of the tenure (retirement), up to 60% of the corpus can be withdrawn from NPS and the remaining 40% will be invested in an annuity provided by insurance companies. A subscriber has to buy an annuity which will be at least 40% of the total corpus.
If you want to withdraw before 60 years of age, you would be required to invest at least 80% of the pension wealth to purchase a life annuity from any IRDA–regulated life insurance company. The remaining 20% of the pension wealth may be withdrawn as lump sum.
Pension will be given to the subscriber on a monthly basis based on annuity scheme chosen at the time of retirement. Withdrawal amount will be sent directly to the subscriber’s bank account. The withdrawal amount and the pension amount both are taxable. In case of death of a subscriber, nominee will receive 100% of fund value.
A simple but effective way to plan your retirement
Awareness about NPS needs to be created among investors