Complete guide on New Pension Scheme (NPS) in India
Govt. of India launched new pension scheme (NPS) in Apr 2009. NPS scheme has out beaten even equity markets and provided returns of 12% to 14% in 2012-13. Several people call with various names such as NPS, National Pension Scheme, National Pension system, New Pension scheme and New Pension system. Whatever name you call, NPS scheme is launched with an aim to promote security of income to Pension fund subscribers in old age. It helps to save for life after retirement + provides good returns. This topic has been chosen from "Suggestion a topic" requested by Sara and several others.
What is New Pension Scheme (NPS)?
NPS is a good retirement scheme for employees of Government and private employees. NPS can be taken by all citizens of India. NPS is available in 3 approaches. Tier-I, Tier-II and Swavalamban Scheme. NPS was already available for government employees and it is extended to other citizens of India w.e.f. 1-May-2009.
Tier-I Account: You cannot withdraw the amount up to retirement. Government employees have to mandatorily invest 10% of their salary into NPS Tier-1 account. Tier-1 account is mandatory to open for Tier-2 account.
Tier-II account: You can invest and freely withdraw money from this Tier-II account. Minimum contribution is Rs 1000 during registration and Rs 2000 for the entire year. You need to contribute atleast one contribution per year.
Swavalamban account: This type of NPS is provided for encouraging poor workers. Under this scheme, Govt of India would pay Rs 1,000 per year for first 4 years as its contribution. However there are several conditions attached to this.
Also Read: SBI Pension Plan Scheme-Annuity Plus-Review
What is the eligibility to join New Pension Scheme (NPS)?
- Every citizen of India whether resident or non-resident is eligible to join New Pension Scheme (NPS). However an individual should be 18-55 years of age as on the date of submission of application to the authorized companies (called POP-SP’s which I would tell you little later).
- They should comply with KYC Norms.
How to enroll to the New Pension Scheme (NPS)?
- Fill the registration form and submit it to POP-SR of your choice. Currently there are 22 POP’s from whom you can choose.
- NRI’s should have a bank account in India to open NPS. Contributions from NRI’s are subject to RBI and FEMA regulations time to time.
- After the account is opened, IRDA CRA would mail you welcome kit which contains Permanent Retirement Account Number (PRAN).
- You will get Telephone Pin (TPIN) to access toll free number of 1800-222-0808. You also get Internet Pin (IPIN) to access CRA website about your pension account. The site is npscra.nsdl.co.in
How much a subscriber should contribute to NPS?
- Subscriber should pay a minimum of Rs 500 per month and yearly contribution of Rs 6,000.
- Contribution should be paid by local cheque, cash or DD. Outstation cheques are not acceptable.
Also read: Should you buy Mutual Funds pension plans?
Benefits of investing in NPS
- Voluntary NPS: NPS is open for all citizens of India who want to voluntarily contribute.
- Process is simple: You can open account with any of the POP’s and get PRAN.
- Flexible: NPS is flexible and you can choose your own investment options and pension funds and secure your money to grow
- It is portable: You can open account anywhere in the country and can use the same account even if you change job or move to other city or change the pension fund.
- Well regulated: NPS scheme is regulated by PFRDA. NPS trust would do performance reviews of fund managers and monitors regularly.
- On attaining 60 years of age: 40% of pension wealth should be annuitized and 60% can be withdrawn as lump sum in a phased manner. Phased withdrawal should be done: a) Minimum 10% should be withdrawn every year b) Any amount lying and credited at 70 years of age should be compulsorily withdrawn in lump sum.
- Withdrawals before 60 years of age: Compulsory annuitization of 80% of pension wealth with any IRDA regulated insurance company and balance 20% can be withdrawn in lump sum.
- Death: In case of death, option for nominee to receive 100% of pension wealth in lump sum. If he/she want to continue NPS, he/she need to subscribe for NPS and comply with KYC norms.
- Tax benefits: NPS is eligible for tax benefits under section 80C (Maximum of Rs 150,000). From FY 2015-16, an additional Rs 50,000 is eligible u/s 80CCD (1b) for the contribution made towards NPS.
What are the Investment choices available for NPS subscribers?
There are two approaches. Active Choice (Individual Funds Asset Class E, C and G) and Auto Choice (Life cycle fund).
a) Active Choice – Individual Funds:
Asset Class-E: Investment predominantly would be equity markets. Investment in this option would be high risk, high return.
Asset Class-C: Investment would be fixed income investments other than Government Securities. This option would be moderate risk, moderate returns option.
Asset Class-G: Investment in Govt. Securities. This option is low risk, low returns option.
You can invest entirely in Asset Class-C and Asset Class-G and up to 50% in Asset Class-E.
Choosing an Asset class is important as the returns would depend upon this.
b) Auto Choice-Life cycle fund
This auto choice – Life cycle fund is good for people who has little knowledge where to invest and not able to decide on the investment options.
Age: Asset Class-E Asset Class-C Asset Class-G
35 50% 30% 20%
50 20% 15% 65%
55 10% 10% 80%
NPS charges also are too small. They charge 0.009% fees on the asset value along with other small charges on additional transactions basis.
Bank of India is the functioning as NPS Trustee Bank.
Also read: Ways for retirement planning in India
Points of Presence (POP)
There are some institutions which are acting as POP’s for customer interface for non government subscribers who wish to open PRAN for NPS. You can approach them to open NPS account and start investing.
- Allahabad Bank
- Axis Bank
- Central Bank of India
- Citibank
- Computer Age Management Service Ltd
- ICICI Bank
- IDBI
- ILFS
- Kotak
- LIC of India
- Oriental Bank of Commerce
- Reliance capital Ltd
- State Bank groups
- South Indian Bank
- Union Bank of India
- UTI Asset Management Company
There are some intermediaries like ICICI Direct, Fundsindia.com through whom you can subscribe for NPS.
Conclusion: There are various investment opportunities for retirement investment plans which provide annualized returns 6% to 8%. However in FY 2012-13, NPS has provided a return of 12% to 14%. It has provided 18% to 20% in 9 months of the financial year 2014-15. The performance may not repeat in future, however there are greater changes that NPS would provide higher returns to you over long run. In case you are doing retirement planning, consider NPS as the top item.
Detailed application and features are available at this link.
Readers, what is your opinion about NPS? Do you have any other better investment options for retirement investment plans?
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Suresh
New Pension Scheme (NPS)
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Hi Suresh,
Thanks for the information. I just want to confirm my understanding quoting an example.
I am 24 years of age now. I pay 10000 per year and so i would be paying for 36 years till my age is 60. So my total payment would be 36*10000 = 3,60,000. Considering I have opted for investment in Fixed Deposit for 8%, the total amount at the age of 60 would be 3,60,000 * 8% = 3,88,800.
Now can you please let me know, how this 3,88,800 will be provided to me, considering that I dont want to withdraw till 70 years of age.
My doubts are :
1) Will this 3,88,800 be provided to me on monthly basis upto 70 years of age?
2) If yes for the above question then will the interest continue upto 70 years for the remaining amount?
3) Will there be any loyalty amount given at the end of 70 years?
Once again thank you for your post.
Fixed Deposit for 8% is just for an example to make the understanding more easy. Main intention is to come up with a total amount with benefits at the end of 60 years 🙂
Elavarasu, The computation is not correct. If you deposit Rs 10,000 every year, the interest would be computed every year based on the closnig balance. Hence you would get compounding interest on the amount invested every year. The interest would continue upto the retirement age where you need to withdraw the NPS amount as per guidelines. There would not be any loyalty additions.
Thanks for your reply Suresh
Sir ,My age is 34 . Iam working as a sales man in a medical shop , my income is 7000 per month .I want to join in pension schme,my doubt is after finishing my 60 years will they pay me pension upto my death.what is the amount to pay per month how much year i want to pay , I need not any money from that . but I want money after
60 years ,as per month like before our grandfather pension. please give me a clarification
Hi Bala, Yes one would get pension from retirement date to the death of the individual. There are various schemes available like NPS, LIC Pension plans etc. Please review them and buy a suitable one suitable for you.
thank you for kind reply sir.
Thanks for giving information.Can I increase my contribution in future.Like today my monthly contribution is 1000,can I increase it to 2000 monthly after one year…..
Satyam, Yes you can increase.
Dear Mr.Suresh,
Greetings!
Hope doing good and enjoy sharing good things……,
Interesting to know that NPS is one of the best option for Private / Public ltd company employees like me!
Could you please send me a RETURN (with low risk and Moderate) example from NPS for a person whose age is 35 now and want to invest in NPS to get a Reasonable Pension to satisfy his wants and needs (Now he requires Rs.10,000 per Month) after the retirement. Please consider the inflation during the year 2035 to 2050.
If anything special reference to female categories in NPS kindly notify that too.
With regards,
R.Balasubramanian.
Balasubramanian, I could not understand your question. If I understood correctly, you are asking what would be the returns on such pension amount ? As indicated, this would be around the same as PF interest rate. However computing 10K per month after 25 years of period considering inflation would be tough. There are no special preferences for females in NPS.
Hi Suresh!,
Nice article.Thanks for posting.I am Gulf based NRI planning to start investment in NPS.I have few queries pls. help me out.
*Can we invest say as single premium(once a year) if so what is the maximum
*Suppose we did pay 1-2 year or we discontinue after 5-6 years what will happen to the investment
*PPF or NPS Pls advice.
Thanks Many
Saleem
Saleem 1), You can pay Rs 6,000 minimum yearly contribution 2) It is no where written about what happens if one doe snot contribute any year, hence not able to comment
Thanks Indeed Mr.Suresh.