National Pension Scheme

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NPS: National Pension Scheme Overview

National Pension Scheme (NPS) is a government-sponsored pension scheme for government employees. It was launched by Pension Fund Regulatory and Development Authority (PFRDA) in 2004. On 1st May 2009, National Pension Scheme opened to all employees for public, private & other sectors except Armed Forces. The minimum yearly contribution is Rs 6,000, which either can be paid in one go or in installments of at least Rs 500.

National Pension Scheme is a type of investment scheme where individuals can invest in an NPS at regular intervals during their working life. Post retirement, a certain percentage of the financial corpus can be drawn by the individuals. Moreover, the individuals get remaining amount on a monthly basis as pension salary. You can avail tax benefits on National Pension Scheme under Section 80C & Section 80CCD of Income Tax Act, 1961.

What is National Pension Scheme?

National Pension Scheme being the cheapest market linked retirement plan among all other Retirement plans (EPF, PPF and Mutual Funds) suggests that it would have recorded maximum number of sales. But due to excessively less payment of incentive/commission to the intermediaries, it is not getting promoted by them.

The Scenario when the scheme was launched was worse, the fund management cost was limited at 0.0009 per cent and points of presence, or PoPs, where investors open the account, were not permitted to charge more than Rs 20 per account, regardless of how big the investment was. Then there was an account opening charge of Rs 50 for the central record-keeping agency, or CRA, in addition to an annual CRA fee of Rs 225.

The fund management fee for non-government funds has now increased to 0.25 per cent and for government funds it has increased 0.0102 per cent. Also, POPs are permitted to charge Rs.100 plus 0.25 percent of the investment. This change will surely act as an encouragement for the agents who will now actively market the product.

Top Performing NPS Schemes

Scheme Name 1 year returns  3 years  return 5 years return
LIC Pension Fund – Tier II 24.11 12.37 12.34
LIC Pension Fund – Tier I 23.1 12.08 12.31
HDFC Pension Fund-Tier I 19.95 10.07 11.17
Kotak Pension Fund-Tier I 20.38 10.19 11.28
Birla Sun Life Pension Scheme –Tier I 19.82 - -
Birla Sun Life Pension Scheme –Tier II 19.74 - -
ICICI Prudential Pension Fund-Tier I 20.00 10.24 11.32
ICICI Prudential Pension Fund-Tier II 13.22 9.16 10.31
Reliance capital Pension Fund-Tier II 13.26 9.34 10.87
SBI Pension Fund-Tier I 13.19 9.01 9.99

Types of National Pension Scheme

There are two types of accounts that NPS offers:

Tier-I Account

It is a basic pension account with limitations on withdrawal 

*Before attaining 60 years of age, only 20% of the contribution can be withdrawn while the rest 80% has to be necessarily used for buying annuity from a life insurer. Annuity is a series of payments made at fixed intervals of time . Annuity plans necessitate the insurer to pay the insured income at regular intervals until his death or till maturity of the plan. 

*After attaining the age of retirement also (60 years), close to 60% contribution can be withdrawn and the rest 40% again has to be used to purchase annuity from approved life insurers.

Tier-II Account

It is a voluntary savings option from which a person can withdraw money limitless. 

National Pension Scheme Fund Managers

The individual/organization that takes decisions regarding any portfolio of investment (mostly a mutual fund, pension fund, or insurance fund), as per the stated goals of the fund. It is necessary to opt for a fund manager while opening the account.

The money is managed by seven fund managers appointed by the PFRDA. The government employees accounts are taken care of by one of the best three government fund managers, LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions, the money invested by others is managed by one of the six fund managers, ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.

Mentioned below are the salient features of both Tier-I and Tier-II account

Tier-I Tier-II
In case of Government fund, the contribution from the employee's side is 10% basic salary + dearness allowance with exactly same contribution from the employer. The contribution is Rs.1000 at the time of account opening or a minimum contribution of Rs.250 per month can also be chosen. Also, it is necessary to maintain a minimum balance of Rs. 2000 at the end of financial year.
But in non-government fund, the investor pays Rs.6000; with a choice of paying at least Rs. 500 per installment -
In a Government fund, the default investment is made mostly in Corporate and Government bonds The investment is a mix of equity, corporate bonds, government funds, FDs, liquid funds etc.
In a non-Government fund, the default investment is in stocks, corporate bonds, government funds, FDs, liquid funds etc. -

Types of Funds in National Pension Scheme

Class Of Fund Invested In Risk Average Return Since Launch (%)

E

Index based Stocks

Carry market risk like any large cap equity fund

3.79%

C

Bonds issued by State Govt, PSUs and Private Firms

Going by the quality of companies, risk would be low.

8.66%

G

Bonds issued by Central Govt.

Lacks default risk but volatility can't be avoided in long term bonds.

5.92%

Depending on how open the investor is to risk, the corpus can be divided among these three fund classes. Exposure to equity cannot be more than 50%. However if the allocation is not specified, the exposure to various classes, especially equity is decided on the basis of age. 

The above figure also tells us about the average performance of National Pension Scheme  funds in different classes.

The investment mix according to the age of the investor: 

Age of the Investor Percentage of Investment in Various Classes
Up to 35 Years 50% Equity and 50% Debt
40 Years 40% Equity and 60% Debt
45 Years 30% Equity and 70% Debt
50 Years 20% Equity and 80% Debt
55 Years 10% Equity and 90% Debt

 So with increasing age the investment corpus gets more inclined towards Debt

Features of NPS

As a government sponsored pension scheme, some of the salient features of NPS are:

  1. A portion of the national pension scheme goes into equities.
  2. The returns offered by National Pension Scheme are much higher as compared to the traditional tax-saving investment instrument such as PPF.
  3. NPS offers 8%-10% annualized returns.
  4. In case if the individual is dissatisfied with the performance of the fund then he/she can change the fund manager.
  5. Up to the maximum deduction of Rs. 1.5 lakh can be claimed in NPS under section 80C of the Income Tax Act.
  6. For tier-I account, the subscribers are required to make a yearly contribution of Rs.6000 and Rs500 as a one-time contribution. For tier-II account, the subscribers are required to make a yearly contribution of Rs.2000 and Rs.250 one-time contribution.
  7. One cannot withdrawal the entire corpus from the national pension scheme after retirement.
  8. In NPS account one can only withdraw 60% of the fund after retirement and the rest 40% of the fund is invested in the pension scheme in order to receive a regular pension.
  9. An individual can open an NPS account through online or offline process.
  10. One can make a withdrawal for up to 3 times within 5 years of intervals in the entire tenure.
  11. After completion of 3 consecutive years of NPS account, one can make a withdrawal of up to 25% for a specific purpose such as medical treatment, higher education, marriage, buying a house, etc.

Benefits of National Pension Scheme

Pros:

Additional Tax Benefit:

The Finance Bill 2011-12 permits tax deduction on contribution up to 10 per cent of basic salary and dearness allowance (DA) made by an employer towards the national pension scheme (NPS) account of an employee under Section 80CCE. This is over and above the Rs 1 lakh limit and is applicable if the contribution is done by the employer. This is the reason why corporate houses are accepting NPS happily.

There has been a hike in inquiries about NPS mainly because of the tax benefit under Section 80CCE.

Higher Fee to Intermediaries:

The fund management fee for non-government funds has been raised from 0.0009 per cent of assets under management to 0.25 per cent. The fee for government funds has been changed to 0.0102 per cent from April this year

PoPs are allowed to charge Rs 100 plus 0.25 per cent of the investment, as against a negligible fee of Rs 20 previously.

The change is promoting New Pension Scheme by offering incentives to distributors and fund managers. The fund management fee of 0.25 per cent is nothing when compared to other products. 

Disadvantages of National Pension Scheme

Tax on Maturity Proceeds:

There is confusion about taxation at withdrawal. According to the present laws the funds would be taxed at withdrawal.

Under the current laws, around 60 per cent corpus on maturity can be withdrawn while at least 40 per cent has to be used to buy annuity. Presently, returns from annuity insurance plans are not tax-free.

The proposed Direct Taxes Code (DTC) plans to exempt NPS funds from tax at withdrawal. However, it is uncertain if the DTC would allow tax exemption on returns from annuity plans as well.

The tax at withdrawal stands in the way of making NPS the best pension scheme.

Mandatory Annuity:

Another lag is limitation on withdrawal from Tier-I account, the primary account for pension savings. On maturity also, one can withdraw only around 60 per cent funds; the rest has to be used to buy annuity, the returns from which are not tax exempted.

Even the annuity also has to be bought from one of the six PFRDA-approved insurers. Options to choose from in case of the number of annuity providers are anyway less with LIC commanding a 70 per cent market share.

Low on Equity:

NPS portfolios are restricted to have more than 50 per cent exposure to equity. It spells loss for people in their 20s or early 30s, as equity has shown to offer 12-15 per cent returns per year over long periods.

In comparison to traditional retirement schemes such as EPF and Public Provident Fund, which refrain from investing in stocks at all, NPS is the best as it is a lot more flexible in terms of equity exposure.

So, investors wanting higher equity exposure can go for equity mutual fund schemes such as large-cap funds and equity exchange-traded funds.

In Comparison to its competitors; EPS and Mutual Funds, NPS leads by

*Scoring better in performance (refer to the investment mix table) and costs

*But the 40% necessary investment in annuity after attaining the retirement age, 50% cap on equity exposure and taxation on annuity returns does make NPS a not so favorable option.

It is for the investor to decide as performance and costs are good characteristics of NPS that make the latter shine brighter than its expensive counterparts Such as Mutual Funds.

NPS Account for NRI

Non-Residential Indians (NRIs) can also open NPS account and can make full use of the benefits they carry. The NPS is a retirement savings scheme launched by the government of India with an objective to secure the life of an individual financially after retirement. The eligibility criteria for NRIs who want to open an NPS account are.

  • The individual should age between 18 years -60 years.
  • The individual must complete the KYC norms.
  • OCIs and PIOs are not eligible.
  • The contribution towards the national pension scheme should come either from an NRE or NRO account.

Features and Benefits of National Pension Scheme Account for NRI

  • The investment portfolio of NPS account is highly diversified and offers the flexibility to the investors to choose the ratio of funds which should be allotted across different investment options.
  • Investment can be made in different assets such as corporate bonds, equity and government securities.
  • As per the risk appetite of the investor, up to 85% of the fund can be diverted to the corporate bond or equity or government securities.
  • NPS offers two types of investment options for NRIs:
    • Active Choice - the NRI investors can decide the ratio of investment and asset classes.
    • Auto Choice - Based on the age of the investor, the investment is done on behalf of the NRI investor.
  • Every subscriber is given PRAN card with 12 digits unique identification number.

How to Open an NPS Account

The Pension Fund Regulatory and Development Authority of India regulate the operations of the National Pension Scheme. PFRDA offers both online and offline process to open an NPS account.  Let’s take a look at how to open an NPS account.

  • Online Process- An individual can now open an NPS account in a simple and hassle-free way. In order to open an NPS account online, it is important to link the account to the PAN, Aadhaar and mobile number.  Let’s take a look at the steps to open NPS account online. 
    • Go to the website of enps.nsdl.com.
    • Click on the registration and choose the option of ‘register with Aadhaar’.
    • Enter the Aadhaar number and click on the option of ‘generate OTP (One Time Password)’.
    • An OTP will be sent to the registered mobile number.
    • Enter the OTP along with personal information, bank details and nomination details.
    • Once the application form is successfully submitted, the Permanent Retirement Allotment Number (PRAN) will be allotted to the applicant.
    • Once the individual submits the e-signature and photograph and OTP will be sent to the registered mobile number.
    • Enter the OTP to verify the signature and make payment.
  • Offline Process - In order to open NPS account manually or offline, the individual will require finding Point of The individual will require collecting the subscriber form from the nearest PoP and submitting it along with the completed KYC papers. Once the individual makes the initial investment, the point of presence will send you a Permanent Retirement Account Number (PRAN). The PRAN number and password in the sealed welcome kit will help the individual to operate the account. The offline process to open NPS account includes one-time registration fees of Rs.125.

National Pension Scheme FAQ's

Q: Can I have two NPS accounts?

No, you cannot open more than one NPS accounts. Moreover, there is no need to open another NPS account because NPS can be ported across locations and sectors.

Q: Who are eligible to take the National Pension Scheme?

Any Indian citizen who falls in the age group of 18 years and 60 years is eligible to take the National Pension Scheme as the part of his/her retirement planning. However, the only condition that he/she needs to comply with is to know his/her to KYC norms. 

Q: What is the lock-in period for the National Pension Scheme (NPS)?

Upto 60 years of the insured. However, an insured can also opt for premature exit from this scheme after completing at least 10 years with it, but in this case, 80% of the corpus is annuitized. The insured can withdraw only the remaining 20% as a lump sum. Here, both lump sum and annuity are taxable. In addition to this, an insured can also make a withdrawal of up to 25% of the corpus on some special grounds and these withdrawals will be free of tax.

Q: How much can I invest in NPS?

Earlier it was Rs.1 Lakh under section 80CCD and in the budget of the year 2015, it was increased to Rs.1.5 Lakh.

Q: How can I join the National Pension Scheme?

There are four steps to join NPS, these steps are:

  • The prerequisite to join NPS is Permanent Retirement Account Number (PRAN). One can get the forms for PRAN from any of the presence service provider (POP-SP) under National Pension Scheme.
  • Then the details of the applicant, preferred scheme details, and details of the bank have to be filled in the application form. ID and address proof, photograph for the KYC should be attached in the application form.
  • An applicant should submit this form with all the required documents at the office of the POPSP. The PRAN is generated and issued to the address of the applicant soon after verification and processing of this form.
  • When an applicant is submitting the form, he/she has to contribute at least Rs.500 to the POP-SP. For the same, the applicant has to fill a contribution slip (NCIS) with the particulars of the payment instrument with the payment.

Q: Can I transfer my NPS account?

Since you cannot have two NPS accounts, so if you change job or switch employer, you have to transfer your NPS account from your old employer to new.

Q: What are the tax benefits of the national pension scheme?

Your contribution towards National Pension Scheme makes you eligible to get tax benefits under section 80CCD (1) of the Income Tax Act. The ceiling on the tax deduction in section 80C and 80CCE is Rs.1.5 Lakh. The tax exemption for the contribution of employer comes under section 80CCD (2). In addition to this, you can claim an additional tax deduction of maximum Rs.50, 000 in section 80CCD (1B) that is additional over the permissible limit of Rs.1.5 Lakh. If you are self-employed, then also you can contribute 10% of your total gross earnings under section 80CCD (1) in the National Pension Scheme.

Q: How can I pay NPS online?

Follow the below steps to pay NPS online:

  • Enter the PRAN number.
  • Select the type of account.
  • Select the category of the account.
  • Enter the payment amount.
  • Click ‘Submit’.
  • Check the online reference number or PRAN, email id, mobile number, and email id.
  • If all the information is correct, click ‘Pay Now’.

Q: Which is the best National Pension Scheme?

Below mentioned is the list of eight top pension fund managers:

  1. HDFC Pension Fund
  2. Birla Sun Life Pension Scheme
  3. ICICI Prudential Fund Scheme
  4. LIC Pension Fund
  5. Kotak Pension Fund
  6. National Pension Scheme SBI
  7. Reliance Capital Pension Fund
  8. UTI Retirement Solution

Latest News - National Pension Schemes (NPS)

Budget 2017 Brings Relief to the Salaried Individuals Investing in NPS

Delhi, India, Feb 01: With the release of Budget 2017, there is a relief for salaried individuals investing in National Pension Scheme (NPS) through their companies as they can now withdraw 25% of their handouts without paying any tax. The Government has initiated some amendments in NPS under which a part of withdrawal from National Pension Scheme is now Tax-free. This initiative taken by the finance minister Mr. Arun Jaitley has brought a major relief to the NPS subscribers.

The budget has eliminated the gap between individual tax-paying employees and self-employed persons in terms of income tax under section 80CCD. In order to grow the upper limit of contribution to NPS from 10% of gross total income of a salaried individual to 20%, the amendment of section 80CCD has been proposed.

Please check Retirement Plans India

According to the sources, the amendment will bring equality in tax treatment between the employee and self-employee or non-salaried individual. The measures taken by the government will come into action from April 1st 2018 and will be applicable to the assessment year of 2018-2019. 

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