NPS:- A Boon For Retirement Life

Unlike several developed countries that have state-provided social security to citizens, we do not have any such state support. The salaried have some form of mandatory savings towards retirement with EPF (employee’s provident fund) and several other means to create a retirement corpus. Unlike an earlier era, when family members took care of their elders, the concept of nuclear families practically leaves it for you to fend for yourself in retirement. These days, with increasing longevity, retirement could last for up to 30-40 years, which requires adequate funds to plan for.   

Perhaps, keeping these issues in mind, the government of India felt the need to create a pension system to encourage people to save towards their retirement. The NPS or the National Pension System (NPS) is a voluntary retirement scheme set up by the government through which you can save for your old age pension or create a retirement corpus. The scheme was launched for government employees from January 1, 2004, and from May 1, 2009, to all citizens of India. The NPS is regulated by the PFRDA (Pension Fund Regulatory & Development Authority).

About NPS

1. NPS is a ‘Government of India’  initiative with an objective of Development of a sustainable and efficient voluntary defined contribution Pension System in India. It is regulated by PFRDA.

2. NPS provides a platform for savings through four baskets of Investment – Equity (E), Corporate  Bonds (C), Govt. Securities (G) & Alternate Asset Class (A) to create a Retirement Corpus (Pension      Wealth), to enable subscriber for purchasing Annuity post retirement.

3. It allows for withdrawal of up to 60% of the Retirement Corpus post retirement. The withdrawal can     be spread over 10 Years post Retirement age. All the withdrawals are Taxfree.

4. It is open for all citizens of India (Resident/Non Resident) who are between 18- 70years of age

5. Minimum investment amount :- 

• Account Opening      :- 1000 rs
• Annual Contribution :- 6000 rs                         

                     Advantages of NPS

1.Lower Expense Ratio: NPS is perhaps the world’s lowest cost pension scheme. The total recurring expenses inclusive of the Fund Management fee and all other handling and administrative charges would work out to be around 0.21% p.a. The low cost would lead to generation of higher Retirement Corpus and hence the retirement benefits.

2.Ensures Complete Portability: NPS provides seamless portability across jobs and across locations, unlike all current pension plans, including that of the EPFO. NPS account can be operated from anywhere in the country irrespective of employment and geography.

3.Flexibility: NPS offers a range of investment options and choice of Pension Fund Managers (PFMs).  The Subscribers have a freedom to change the PFM once a year and the Investment Mix twice a year. Choice of Life Cycle Fund is also available. 

4.Well Regulated: NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust.

JOURNEY OF NPS

• NPS started only for Government Employees -200
• NPS for  Individuals (Private) – 2009
• NPS  Corporate Model – 2010
• NPS  Swavalamban 2013

Exclusive Income Tax Benefits for investments in NPS:

(i)   An additional tax deduction on investment up to Rs. 50,000 in NPS under sub-section 80CCD (1B). This is over and above the Sec 80 C limit of Rs.1,50,000/-. This is an exclusive tax deduction available for investment in NPS only. 

(ii)  Tax deduction on account of contribution by the individual subscriber to NPS can be claimed up to 20% of salary (Basic + DA) or 10% of Annual Income under Sec 80 CCD(1), subject to overall ceiling of Rs. 1.50 lacs u/s 80 CCE of Income Tax Act. 1961.

(iii) Tax deduction on employer’s contribution to NPS up to 10 % of salary (Basic + DA), under Section 80 CCD(2). The upper cap on the amount is Rs.7.50 Lakhs. 

     Tax benefits mentioned in point (i) & (iii) above are exclusive deduction available for investment in NPS only.

EEE Status (Exempt Exempt Exempt) in line with EPF and PPF:  In NPS now there is complete tax exemption to the withdrawals on maturity. Hence, now there is Exemption at the time of Investment, Exemption at the time of accretion and Exemption at the time of Withdrawal) in line with EPF and PPF.

NPS TAXABILITY  

A. Contribution in Tier-I Account

   1. Subscriber’s own contribution:  Additional deduction up to  Rs.50,000/-  under Sec 80 CCD(1B) available over and above  Rs.1,50,000/-  under Sec 80 C

   2. Employer’s contribution: Deductible up to 10% of salary (Basic + DA) as additional deduction under section 80CCD(2). It has no upper cap on the amount. 
B. Accretion in Tier-I :  Exempt
C. Withdrawal from Tier-I (including accretions)
1.  Amount used to purchase annuity (Minimum 40%) is exempt. 2.  Rest of the Retirement Corpus withdrawn TAXFREE.
                                           Additional Tax benefits extended to NPS   
1.Waiving service tax on the NPS corpus utilized for purchase of annuity.2.Tax exemption of the NPS corpus  receivable by the nominee in case of death of the NPS subscriber .3.One time portability without any tax implication for shifting from (a) recognized provident fund and (b) superannuation fund to NPS.               In a nut shell, NPS now enjoys EEE Status in line with EPF & PPF 

Early Withdrawal and Exit rules
As a pension scheme, it is important for you to continue investing until the age of 60. However, if you have been investing for at least three years, you may withdraw up to 25% for certain purposes.
These include children’s wedding or higher studies, building/buying a house or medical treatment of self/family, among others. You can make a withdrawal up to three times (with a gap of five years) in the entire tenure.
These restrictions are only imposed on tier I accounts and not on tier II accounts. Please scroll down for more details on them.
Withdrawal Rules After 60
Contrary to common belief, you cannot withdraw the entire corpus of the NPS scheme after your retirement. You are compulsorily required to keep aside at least 40% of the corpus to receive a regular pension from a PFRDA-registered insurance firm.
The remaining 60% is tax-free now. The latest update from the government says that the entire NPS withdrawal corpus is exempt from tax.
NPS Scheme Details

• Scheme E : Represents Equity Scheme with investment in equity / Index fund / ETFs 
• Scheme C : Represents Corporate Debt Scheme with investment in corporate debt instrument with residual maturity of atleast 3 years
• Scheme G : Represents Gilt Scheme with investment in government securities
• Scheme A : Represents investment in Alternate Investment Fund (AIF)Alternate  Investment Fund (AIF) not available for investment in Tier II account. 

Investment choices

• Active Choice: 

    Subscriber can select asset allocation as per the following 

TYPE OF ASSETS                               MAXIMUM ALLOCATION

Equity (E)                                                      75%

Corporate Bonds (C)                                    100%

Govt. Securities (G)                                     100% 

Alternate Investment (A)                             5%

• Auto Choice:

    Investment will be made in life–cycle fund having pre-defined portfolio. 

    The investment in Equities  will decrease and Corporate Bonds and Govt. Securities  will increase with subscriber’s age

    (1) LC75 – Aggressive Life Cycle Fund: Equity exposure starts with 75% 

    (2) LC50 – Moderate Life Cycle Fund: Equity exposure starts with 50% 

    (3) LC25 – Conservative Life Cycle

List Of The Fund Managers     Upon exit from NPS customer can select any of the life Insurance companies registered         with PFRDA to get monthly pension. Customer also gets a choice of Annuity scheme      

     List of Pension Fund Managers 

•   Birla Sun Life Pension Funds
•   HDFC Pension Fund
•   ICICI Prudential Pension Funds
•   Kotak Pension Fund
•   LIC Pension Fund
•   SBI Pension Fund
•   UTI Retirement Solutions

         (FM can be changed once in a Year)Annuity Service ProvidersThere are 11  Annuity Service Providers  (a)  Life Insurance Corporation     (b)  HDFC Life Insurance     (c)  ICICI Pru Life Insurance     (d)  SBI Life Insurance     (e)  Star Union Dai-Ichi Life Insurance (Bajaj, Edelweiss, India First, Canara HSBC,  Kotak Mahindra, Max Life) (Options to be selected by the NPS Subscriber)  –  Once selected = no reversion( Selection Time = 6 Months)

How to open the NPS account

Please submit the below documents for NPS account opening:

     1.Duly filled and signed form or Digital through OTP based

     2.One Passport Size Photo 

     3.Self attested copy of PAN Card 

     4.Self attested copy of Address Proof 

     5. Cancelled Cheque 

     6.Contribution of Rs.50,000

     7.NACH Mandate (for set up of Auto Debit from his/her Bank account towards NPS) 

FAQ’S

Q.1  Who can subscribe for NPS?
Ans. NPS can be joined by any citizen of India, whether Resident or Non-Resident between 18-70 years of age.
Q.2   If I have invested in any other Provident Fund, can I still invest in NPS?
Ans. Yes. Investment in NPS is independent of your contribution to any Provident Fund
Q.3   Is there any upper limit of Investment?
Ans.  No there is no upper limit on investment in NPS.
Q.4  What investment choice / scheme preference does the subscriber have?
Ans. The NPS offers you a choice of two methods to invest your money:
Active choice -Individual Funds (Asset Class E,C,G and A)     
  Auto choice – Life cycle Fund
Q.5 When can I change the scheme preference?
Ans.The subscriber shall be allowed to exercise the choice only once, at any time during the financial year.
Q.6  How do I select the Pension Fund Manager for my NPS savings?
Ans. You are required to specify your Pension Fund Manager (PFM) at the time of applying for NPS                registration. You will be required to indicate your preferred PFM out of the 7 PFM identified by PFRDA.
Q.7  Can I transfer my savings amount from NPS Tier II account to NPS Tier I account?
Ans. Yes. You transfer savings from Tier II to Tier I, but not vice versa.
Q.8 Can I have more than one NPS account?
Ans. No, multiple NPS accounts for a single individual are not allowed and there is no necessity also as the NPS is fully portable across sectors and locations.

To Summarize all the idea behind the NPS was to fulfill below objectives:-

• Pension for all irrespective of person working in organised or unorgenised sectore
• To participate the market based return over the long term.
• Ensuring the retirement corpus for all the citizens.