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NPS

New Pension System (NPS)

What is NPS?

New Pension System (NPS) is a scheme introduced originally in 2003 by the Government of India to Enable individuals to save for their retirement, and was extended in 2009 to cover employees of private Sector as well. Effective April 1st, 2011, the Government has exempted from Income tax the contribution through the employer.

The scheme is administered and controlled by the Pension Fund Regulatory & Development Authority – PFRDA (www.pfrda.org.in)

In NPS, a subscriber contributes every year till retirement and the contribution is invested as per the Investment pattern selected by the subscriber. On retirement, part of the investment corpus (Pension Wealth) accumulated is paid in lump sum while the remaining goes in purchasing a life annuity which Will ensure stable monthly income to the subscriber till death.

Who can invest in NPS?

Any Indian citizen, whether resident or non‐resident, can invest in this scheme provided he is between 18 to 60 years of age as on the date of submission of application. The applicant would also be expected to complete the regular KYC formalities before opening the account.

What are the benefits of NPS?

  • Voluntary ‐ Open to all Indian Citizens
  • Simple ‐ Easy to operate
  • Flexible ‐ Option for choosing Pension Funds
  • Investment Option ‐ Choose between Equity / Fixed Income Instruments / Govt. securities
  • Portable ‐ Can be operated from anywhere in the country
  • Regulated ‐ Regulated by PFRDA, a statutory authority
  • Cost ‐ Lowest fund cost
  • Returns ‐ Market driven returns

What are the types of account under NPS?

Tier I and tier II are the two types of accounts available for investment in NPS.

  • Tier‐I account: You shall contribute your savings for retirement into this non‐withdrawable Account.
  • Tier‐II account: This is a voluntary savings facility. You will be free to withdraw your savings from

This account whenever you wish, subject to certain conditions.

  • However, a subscriber needs to have Tier I account before opening tier II account.

What are the differences between Tier I and Tier II accounts?

Tier I Tier II
Contribution Minimum of one Contribution per year No such requirement
Minimum Contribution ‐ Rs.500 at

The time of Account opening.

Minimum Contribution ‐ Rs.1,000 at the time of

Account opening.

Minimum Contribution ‐ Rs.500 per

Contribution.

Minimum Contribution Rs.250 per contribution.
Minimum Annual Contribution ‐

Rs.6,000

No such requirements, contribution is purely

Voluntary.

Non‐withdraw able, balance keeps

accumulating at end of each year

Withdraw able, subject to the condition that a

minimum balance of Rs.2,000 should be

Maintained at the end of each Financial Year.

Withdrawal One time withdrawal of up to 20%

before 60 years, balance 80% has to

go for Annuity

No limit on Withdrawal
At 60 years can withdraw 60% and

balance 40% needs to go into

Annuity.

Transfer to Tier I allowed.
Pension

Payout

Customer to choose the Annuity

Fund

Flexibility of anytime withdrawal.
Pension will be paid till the age of 70 years and balance amount to be

withdrawn

What are the tax benefits available under NPS?

Amounts allocated under the FBP plan towards NPS would be fully tax exempt.

What are the charges under NPS?

NPS offers an extremely low cost option for retirement planning. Because of such low charges, the banks and other intermediaries do not promote the NPS scheme.

A 0.0009%* 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 summary of charges under NPS:

Intermediary Charge Head Service Charge* Method of Deduction
NSDL (Record

keeping Agency)

Account Opening Charges Rs.50 Through cancellation
ICICI Bank (POP) Initial subscriber registration and contribution

upload

Rs.40 To be collected

upfront

Any subsequent transactions Rs. 20 Rs. 20
Custodian Asset Servicing charges 0.0075% Through NAV

deduction

Fund Manager Investment Management Fee 0.0009% p.a Through NAV

deduction

 If the subscriber contributes less than Rs. 6,000 in a year, then

a. He would have to bear a default penalty of Rs 100 per year of default and the account would

Become dormant.

b. In order to reactivate the account, the subscriber would have to pay the minimum

Contributions, along with penalty, due for the period of dormancy.

c. A dormant account shall be closed when the account value falls to zero.

 The fee structure may change as may be decided by PFRDA/NPS Trust from time to time.

Who manages the amounts contributed to NPS?

PFRDA has appointed six Pension Fund Managers (PFM) to manage the fund, and a subscriber has to

choose one with whom he wishes to place his money.

  • Pension Fund Manager available are listed below in alphabetical order:
  • ICICI Prudential Pension Funds Management Company Limited
  • IDFC Pension Fund Management Company Limited
  • Kotak Mahindra Pension Fund Limited
  • Reliance Capital Pension Fund Limited
  • SBI Pension Funds Private Limited
  • UTI Retirement Solutions Limited

A subscriber has to compulsorily select one of these fund managers; otherwise the application will be rejected. In case he is not satisfied with the performance of a fund manager, he has the option to switch to another manager. However, this option can be utilized only once in a financial year.

Where do the funds get invested?

After selecting the fund manager, the subscriber needs to select any one of the two approaches available to invest the money.

The asset classes under which the funds are invested are equity (E), fixed‐income instruments (C) or government securities (G).

NPS offers the following two approaches:

1. Active choice‐ subscriber has an option to decide the % in various asset classes.

  • A subscriber can invest up to 50% (max limit) of its pension wealth in equities and the remaining either in fixed‐income instruments or government securities or both.
  • Once the option is selected, the pension fund managers will manage your investment in

the said proportion.

  • A subscriber has an option to change his allocation pattern for subsequent investments.

2. Auto choice‐lifecycle fund

  • In case an individual does not want to choose the allocation pattern or in case he is not Aware which allocation pattern is right for him, he can choose auto choice option.
  • If the subscriber does not select any option, by default auto choice will be selected.
  • In this option, the investments are made in a lifecycle fund. The proportion of funds across the above 3 asset classes will be determined by a pre‐defined portfolio based on age.
  • When the subscriber is young, major portion of the investment will go to equities. As he Grows old, the exposure to equities will reduce and government securities will increase.

What are the risks to take note of?

1. There are no guarantees on investment. NPS is a defined contribution plan and the benefits would depend upon the amounts of contributions invested and the investment growth up to point of exit from NPS.

2. You may seek professional advice to assist you in planning your finances. However, this would be your own decision and PFRDA would not be responsible for any consequences.

3. Past performance of the Fund Manager does not guarantee future performance of the investment.

4. The name of the Fund does not in any manner indicate either the quality of the investment

Scheme or its future prospects and returns.

5. All investments are subject to market risks and there is no assurance or guarantee that the

Investment objectives shall be achieved.

6. Investment involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.

7. Value of your investment in the NPS may go up or down depending upon the forces and factors affecting financial markets in general.

8. Tax laws may change, affecting the Return on Investment (ROI). Please read through the detailed statement of other risks available on the PFRDA website.

What are the investment options ?

 Choose the Pension Fund Manager. Options available are listed below in alphabetical order:

  • ICICI Prudential Pension Funds Management Company Limited
  • IDFC Pension Fund Management Company Limited
  • Kotak Mahindra Pension Fund Limited
  • Reliance Capital Pension Fund Limited
  • SBI Pension Funds Private Limited
  • UTI Retirement Solutions Limited

 Choose the investment options

  • Active choice ‐ Individual Funds ‐ You will have the option to actively decide as to how
  • your 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.
  • Auto choice ‐ Lifecycle Fund
  • In this option, the investments will be made in a life‐cycle fund. Here, the
  • Fraction of funds invested across three asset classes will be determined by a predefined portfolio.
  • For the age band of 18 to 36 years, the auto choice will entail investment of 50%
  • Of pension wealth in “E” Class, 30% in “C” Class and 20% in “G” Class.
  • From age 36 onwards, the weight in “E” and “C” asset class will decrease
  • annually and the weight in “G” class will increase annually till it reaches 10% in
  • “E”, 10% in “C” and 80% in “G” class at age 55.

Where can I get more details about the NPS?

Please go through the web site of PF Regulatory & Development Authority, which has comprehensive

information on the scheme and all the related components.

The official Website: http://www.pfrda.org.in/

Download the NPS Application form : NPS Application Form

Download the NPS Contribution slip form:NPS Contribution slip form


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One Response to “NPS”

  • Deepak says:

    The site has very good information on the New Pension Scheme and the way it is implemented in an Indian Context. It also has the NPS contribution slip and the application form which can be leveraged for opening an account.

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