What do you understand by National Pension Scheme (NPS)?

 What do you understand by National Pension Scheme, NPS?

The changes introduced in the NPS, 2016

The PFRDA, in its circular added two more options of life cycle funds under Auto Choice option viz. Aggressive Life Cycle Fund and Conservative Life Fund on November 4, 2016. The introduced options are in addition to the Existing life cycle fund (Moderate life cycle fund or LC 50), which shall be the default fund, but the government subscribers will not be having these two additional options. As for the government subscribers, the equity allocation is still capped at the 15%.

For the private sector members, a new class asset ‘A’ for substitute investments has been added to the table by PFRDA. This asset class is in the addition to three existing asset classes i.e. Equity (E), Corporate Bonds (C) and Government Debt (G).  Investment in Asset Class (A) shall comprise the following:

The commercial mortgage is based upon the securities or the Residential mortgage is based securities.

Units are issued by the Real Estate Investment Trusts regulated by SEBI.

The asset backed securities are regulated by SEBI.

The units that are issued by Infrastructure Investment Trusts is regulated by SEBI

Alternative Investment Funds (AIF Category I and II) is also registered with SEBI

DEFERRING PURCHASE OF ANNUITY: At the retirement, the NPS investors have this mandatory point to buy an annuity with 40% of the corpus.  The PFRDA has now allowed the investors to defer the purchase for up to three years. They have the option to buy annuities till the age of 63.

40% OF CORPUS MADE TAX FREE ON MATURITY: 2016-17, Budget had made 40% of the NPS corpus tax-free on the maturity. This has changed the NPS from an EET product to a quasi EET instrument, where 60% of the corpus is taxable, while 40% are the escapes tax. It has also transformed NPS to be better than the pension plans offered by insurance companies, where you find the tax free withdrawal, which is restricted to 33%. However, there are several competing products such as EPF, PPF and ELSS funds, which are fully tax free on the withdrawal.

while the 40% of the corpus will be put in annuity, the remaining 60% can be withdrawn. But, given the low fund management the charges of the NPS, there is no need to take out the whole 60% at the time of retirement. NPS investors can now have the chance to delay the withdrawals till the age of 70.

The NPS investors can now withdraw up to 25% of their own contribution for specific needs such as children’s higher education or marriage, for construction or purchase of the first house, treatment of critical illness for self, wife, children or parents.

The PFRDA has also lowered the minimum investment from Rs 6,000 to Rs 1,000 a year.

The Government has also enabled the investors covered by EPF and other superannuation funds to shift to the NPS.

National Pension Scheme, NPS

National Pension Scheme (NPS)

What is Pension scheme?

When seen in an English dictionary, the term is defined as a fixed sum paid regularly, especially to a person retired from work.

A Pension Plan is considered as a plan or the product, which promises you a pension i.e. a fixed regular income after your retirement, for a certain period of time. You just invest in the pension plan by paying regular premium or amount. Your amount is invested properly so that it grows. When you retirement comes, your invested amount would have grown to a specific amount and this amount is called annuity. It is an annuity scheme, from which you withdraw a certain income on a regular basis. And these plans are offered by

  • Life insurance companies
  • Mutual funds
  • Indian Government ex: National Pension Scheme or NPS

What is a National Pension Scheme (NPS)?

The National Pension Scheme is a government approved pension scheme for the Indian citizens of the 18-60 age groups. While central and state government employees have to subscribe to NPS (it’s compulsory for them), it’s totally optional for others. NPS is India’s awesome answer to the US’ retirement scheme-401(K).

Why did the Government introduce National Pension Scheme for Government employees (NPS)?

Earlier the Government of India used to render a definite pension to the employees after retirement which was actually based on the employee length of  service and average of the emoluments(Basic Pay+ Dearness Pay+ Stagnation Increment + Non-practising Allowance) drawn during the ten months immediately preceding the date of retirement. From 1 Jan 2004, the Government made it mandatory for the new government employees (except armed forces) to contribute in the National Pension Scheme with matching contribution by the government. This is a move from a defined benefit pension to a defined contribution based pension system. Since 1st April, 2008, the pension contributions of the Central Government employees covered by the National Pension System (NPS) are being invested by the professional Pension Fund Managers in the line with an investment guideline of Government applicable to the non-Government.

Can a Non-Government employee also invest in National Pension Scheme (NPS)?

Yes a Non Government employee, in between the age of 18 to 60 years, can also invest in National Pension scheme. He can join as an individual investor or his company (Corporate house) can also join NPS.

For the corporate NPS contribution will be in addition to the Employee Provident Fund, or EPF, investments.  Wipro Technologies was among the first corporate houses to subscribe this scheme.

If the employer is contributing in NPS, he will be making an equal contribution in the scheme from his side.

The structure will be of Tier-1 type, where the premature withdrawal will not be allowed at all.

Since December 2011 the employer’s contribution is up to 10% of the basic plus DA and is eligible for the deduction under Section 80CCE over and above the Rs 1 lakh limit of 80C.

Employee contribution up to 10% of basic plus dearness allowance, or DA, is also eligible for the deduction under the Section 80CCD within the Rs 1 lakh limit.

Employer can also claim tax benefit for their contribution by showing it as business expense in the profit and loss account.

Who regulates National Pension Scheme (NPS)?

The Nation Pension System (NPS) is simply regulated by the Pension Funds Regulatory Development Authority(PFRDA).

What are the accounts available in the NPS?

Under NPS, two types of account would be available for the people

Tier I: contribute into the pension account with restrictions on the withdrawal.

Tier II: voluntary saving account from, which one is free to withdraw, whenever he/she wishes.

An active Tier I account is a pre requisite for opening of a Tier II. 

 The government and employers will make no contribution to this account.

Swavalamban scheme or the NPS Lite: it is the extension of the variant available for the government employees. The government contributes Rs 1,000 per year to the pension account in the NPS Lite, making pension possible for the economically-disadvantaged. Under the scheme, Govt. will indeed contribute Rs.1000 per year to each of the NPS account opened in the year 2010-11 and for the coming next three years, that is, 2011-12, 2012-13 and 2013-14. As a special case and in recognition of their faith in the NPS, all NPS accounts opened in 2009-10 will be entitled to be the benefit of Government contribution if they fulfil the eligibility criteria as prescribed under these guidelines.

The accumulated wealth in this account can be easily withdrawn anytime without stating any reason.

In NPS what are the options available to the investor?

Under the NPS, how money is invested depends upon your:-

Multiple investment options (equity, fixed income). The investment options are mainly called the asset classes and are based on the risk and returns. There are E, C and G Asset classes to choose from.

E – Investments in the predominantly Equity market instruments

G – Investment would be in the Government securities like GOI bonds and the State Govt. bonds

C – Investment would be in fixed income securities other than Government Securities or Credit risk-bearing fixed income instruments such as the liquid funds, corporate debt, and fixed deposits.

Choice (Active or Auto) of how money is actually distributed among the asset classes:

If an investor will himself manage the distribution called as Active

If the investor will let the distribution among various assets classes would be determined automatically based on his age called as Auto

Fund: Once the investor decides the Auto or Active distribution, he needs to choose the fund which will invest on his behalf.

The money is mainly managed wholly by the seven fund managers appointed by the PFRDA.

The accounts of the government employees are managed by one of the three government fund managers, LIC Pension Plan, SBI Pension Plan and the UTI Retirement Solutions.

Accounts of others are 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.

So one investing in NPS has to understand various asset classes, now choose precisely how to decide among the various asset classes and then choose a Fund Manager.

 What are asset classes mainly?

There are three individual asset classes based on the risk and return and they are as follows

E – Investments in the predominantly equity market instruments classified as High return, High risk

G -investments in the Government securities like GOI bonds and State Govt. bonds classified as “Low return, Low risk”

C – Investments in fixed income securities other than the Government Securities or on Credit risk-bearing fixed income instruments such as liquid funds, corporate debt, fixed deposits. It is classified as a Medium return, medium risk.

The E Asset class has higher potential returns than the other G asset class, but it also carries the other hand means the risk of investment losses. Investing entirely in the G asset class might not give you very high returns but it is a safer option.

Who manages the money invested in the National Public Scheme –is that the fund managers?

The money is managed by the fund managers appointed by the PFRDA.  You have to opt for a fund manager while opening for the account.

LIC Pension Fund Limited

SBI Pension Funds Pvt. Limited

UTI Retirement Solutions Limited

ICICI Prudential Pension Funds Management Co. Limited

Kotak Mahindra Pension Fund Limited

Reliance Capital Pension Fund Limited

IDFC Pension Fund: It moved out of managing NPS scheme from 1 Nov 2012. It’s assets worth Rs 1,500 crore moved to the SBI Pension Fund.

The accounts of government employees are managed by one of the three government fund managers and they are: LIC Pension Plan, SBI Pension Plan and UTI Retirement Solutions,

The money is invested by others is managed by one of the following fund managers such as, ICICI Prudential Pension, IDFC Pension, Kotak Mahindra Pension, Reliance Capital Pension, SBI Pension Funds and UTI Retirement Solutions.

What are the charges and fees associated with the National Pension Scheme?

Basically, the investors need to pay the handling and administrative charges, fund management fees. Fund management fee varies as 0.0102% for the Government employees and 0.25% of the invested amount for the private sector. When the scheme was introduced in the year 2009, this charge was just 0.0009%. However, in the month of Nov 2012, it was revised to 0.25% to make the scheme more sensible and good enough for the fund management houses.

What is the difference between Tier 1 account and Tier 2 Account?

The Tier-1 account is necessary for all the central and state government employees. To open Tier II account one always needs to have the Tier I account.  The Tier I account differs for the government and non government employee in terms of the contribution, fund management and withdrawal.

What are the Tax Benefits of National Pension Scheme

The NPS tax benefits are available through 3 sections – 80CCD (1), 80CCD (2) and 80CCD (1B). All the tax benefits, annuity restrictions, and the exit and withdrawal rules are applicable to NPS Tier-I account only. The NPS Tier-II account is like to an open ended mutual fund. It’s up to your wish, you can take out the money at any time.

The whole article enlighten you that you should Invest in NPS the National Pension Scheme for additional 50,000 and save tax and also find whether it makes a sense to invest in NPS for tax benefits.

The Section 80CCD (1)
the employee contribution up to 10% of its basic salary and dearness allowance (DA) up to 1.5 lakh is eligible for the tax deduction.

This contribution along with the Sec 80C has 1.5 Lakh investment limit for the tax deduction.

Also, the self employed can claim this tax benefit. However the limit is 10% of their annual income and it is up to maximum of Rs 1.5 Lakhs.

Section 80CCD (2) and Section 80CCD (1B),

Additional exemption up to Rs 50,000 in NPS is also eligible for the income tax deduction.

This was introduced in Budget 2015, for FY 2015-16

The taxpayers in the highest tax bracket of 30 per cent can do save Rs. 15,000 by investing Rs. 50,000 in the NPS. Those in the 20 per cent tax bracket can save about Rs. 10,000, while the people in the 10 per cent tax bracket can do save Rs. 5,000 per year by investing in the NPS.

The additional tax benefit of 50000 is over now and the above benefit of Rs.1.5 Lakhs can be claimed as a deduction under Section 80CCE.

It is totally irrespective of the type of employment. So, a government employee, a private sector employee, self employed or an ordinary citizen can claim the benefit of Rs 50,000 under Section 80CCD(1B).

Henceforth, the total tax benefits that can be claimed for NPS under Section 80CCD (1) + Section 80CCD (1B) is equals to 2 Lakhs for this financial year.

If Employees have savings of Rs. 1,50,000 under 80C excluding the NPS Deductions, Then the Employee can easily show their NPS  Deductions, under 80 CCD(1B), which is over the 1,50,000 Limit.

If the Employee have less than 1.5 Lakh savings in 80C and exceeds 50,000 towards the NPS, then the Employee can automatically split their NPS Amount to 80CCD (1) and 80CCD (IB).

What is tax in withdrawing or on maturity in National Pension Scheme?

The NPS is currently working under the EET (exempt, exempt, tax), which means it is tax free on contribution and the accumulation but taxable on maturity. Hence, an NPS subscriber is taxed on the withdrawal and also when he obtains annuity.

Maturity of NPS

How to withdraw from the National Pension Scheme?

Tier-I comes with partial withdrawal options, which is the subject to conditions.

For those looking to exit before turning to 60, there is an option to withdraw 20% of the accumulated savings but have to buy an annuity with the remaining 80%.

When you attain the age of 60, you will have to invest at least 40% in an annuity with IRDA and can withdraw only up to 60 per cent of the corpus.

The nominees can only withdraw the full amount only after the death of the subscriber.

Who provides the Annuity on withdrawal or maturity under NPS?

Annuity is a mainly series of payments which is made at the successive periods (intervals) of time. For NPS it is bought at withdrawal or on reaching 60 years in the Tier 1 Account. ASPs would be fully responsible for delivering a regular monthly pension on the exit from NPS. The Annuity Service Providers empanelled by PFRDA for subscribers of NPS are as under:

Life Insurance Corporation of India

SBI Life Insurance Co. Ltd.

ICICI Prudential Life Insurance Co. Ltd.

Bajaj Allianz Life Insurance Co. Ltd.

Star Union Dai-ichi Life Insurance Co. Ltd.

Reliance Life Insurance Co. Ltd.

What is Flexibility and Portability of National Pension Scheme?

The investors have the flexibility to choose between fund managers, investment options, and in between Auto or Active choice. Such change can be made only once in a year. NPS account can be operated from anywhere in the country and it is irrespective of the employment and geography.

How many subscribers does NPS have today?

As on March 2, 2013, NPS had a corpus of over Rs 28,400 crore of 44.93 lakh subscribers and around 2 lakh subscribers are from the private sector, while 27 lakh are from the central/state governments. Around 15.79 lakh subscribers are served by NPS-Lite, which is mainly designed to ensure ultra-low administrative and transactional costs.

How one can open new NPS account?

You can simply open the NPS account manually or online through CAMS on internet or through ICICI Direct. For manually one had to visit the nearest POP division.

Now you can also register the NPS account online through eNPS. You can also pay online your NPS contribution, even when you have opened account manually.

What is eNPS?

eNPS is electronic National Pension Scheme and it can seen at  https://enps.nsdl.com/


NPS App gives your full details of Subscribers account online. The Subscriber can access the latest account details as is available on the CRA, web site using user ID (PRAN) and password. The APP access your account details online and renders you with user-friendly interface to browse your account information. It does enable you to maintain your latest contact details and password. It can be downloaded from Google PlayStore.
The APP gives better user experience and provides additional functionality such as
1. To view current Holdings
2. Request for the Transaction Statement for the year on your email ID.
3. You can change contact details like Telephone, Mobile no. and email ID.
4. You can also change your Password / Secret Question
5. You can view your Account details.
6. Also you can regenerate password using secret question.
7. You can view the Last 5 contribution transactions carried out
8. Also get the notifications related to NPS.

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