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.
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.
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.
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
- Computer Age Management Service Ltd
- ICICI Bank
- 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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