New Pension Scheme
- What is the Product?
- Permanent Retirement Account Number: (PRAN)
- Who is eligible?
- Who is Who of the scheme:
- Are the returns on investments is guaranteed?
- What are Fund E, Fund G and Fund C?
- Who are the Fund Managers?
- What is the default option or auto choice?
- Who decides about the Fund Managers?
- How to Exit from the scheme?
- How to prematurely exit from the scheme?
- What if the subscriber dies before he/ she turns 60?
- What are alternate ways to exit?
- What are the tax benefits for NPS?
- What is Concept of Tier-I and Tier-II?
- NPS Lite?
- Features of NPS Lite:
- Swavalamban Scheme
- What to get after 60 years?
- Withdrawal on attaining the Age of 60 years and up to 70 years of age:
- If there is death of the subscriber?
- Recent Updates:
New pension System was introduced by the Government of India in 2004, when it was made mandatory for newly recruited employees (except personnel of armed forces). The scheme came into operation on April 1, 2008. In August 2008, a decision was taken by the government to offer NPS to all citizens of India. The Pension Fund Regulatory & Development Authority (PFRDA) opened the scheme to all citizens w.e.f. May 1, 2009.
What is the Product?
New pension Scheme is a pure defined contribution product. A subscriber can choose the fund option as well as the fund manager. The subscriber gets a retirement corpus when he/ she turn 60.
Permanent Retirement Account Number: (PRAN)
The PFRDA has appointed 22 points of presence (PoPs) which are mainly banks and 6 Pension Fund managers. (Interim arrangements have been made till appointments) . The branches of PoPs are called PoP Service providers. These PoP service providers act as initial points of contact and also collection point, for all citizens who need to get a Permanent Retirement Account Number or PRAN. This number is needed under the NPS
Who is eligible?
Resident & Non Resident Indians between the age of 18-55 years are eligible for new pension Scheme. Please note that NPS is available to all citizens of India on voluntary basis and mandatory for employees of central government (except armed forces) appointed on or after 1 January 2004. All Indian citizens between the age of 18 and 55 can join the NPS. The scheme is NOT mandatory for new recruits in armed forces, while it's mandatory for all new Government officers. Thus, except for the personnel of armed forces, the scheme is Mandatory for all new Government employees.
Who is Who of the scheme:
An account can be opened & operated from anywhere in India. If a subscriber changes a job & location, the pension fund manager can also be changed. To open an account one can approach any branch of bank designated by PFRDA.
- Regulator : Pension Fund Regulatory & Development Authority
- NPS Trust: PFRDA has established the NPS Trust under Indian Trust Act, 1862 and appointed NPS Board of Trustees in whom the administration of the "National Pension System" vests under Indian Law. The Trust is responsible for taking care of the funds under the NPS. The Trust holds an account with the Bank of India and this bank is designated as the NPS Trustee Bank.
- Central Recordkeeping Agency (CRA): The back office for maintaining records, administration and customer service functions. National Securities Depository Ltd has been designated the CRA
- Pension Fund Managers: At present, there are six fund managers
- Trustee Bank: Bank of India is the designated agency to facilitate fund transfers across various entities such as subscribers, the fund managers and the annuity service providers
The contribution amount is
- Minimum Rs. 600 per contribution, there is no maximum amount ceiling.
- Minimum per year Rs. 6000
- Minimum number of contributions per year 4. This implies that the subscribers are required to contribute at least once a quarter but there is no ceiling on how many times one can invest during the year.
Are the returns on investments is guaranteed?
No. There is no guarantee since NPS is a defined contribution scheme and the benefits depend on the amount contributed and the investment growth up to the time of exit.
What are Fund E, Fund G and Fund C?
The New Pension Scheme (NPS) offers subscribers the option of investing their funds in three types of schemes:
- Fund E, which invests a maximum of 50% in equity investment , that consists of index funds that replicate the Sensex or Nifty portfolio. (remember it by Fund in Equity)
- Fund G, which invests in bonds of central and state governments (Remember it by Fund in Government)
- Fund C, which invests in liquid funds, corporate debt instruments, fixed deposits and public sector, municipal and infrastructure bonds. (Remember it by Fund in Corporate)
These three categories have been tagged on the safety pattern as follows:
- G (ultra safe),
- C (safe) and
- E (medium).
Who are the Fund Managers?
The subscribers can choose the fund managers from the 6 companies appointed by the PFRDA. Investors have been also given option to change their scheme choices, which could be related to either the allocation of funds among various asset classes or to the fund manager.
One can choose the investment mix between equity or E (high risk but high returns), mainly fixed income instruments or C (that come with medium risk and returns) and pure fixed investment products or G (which offer low returns but have very low risks associated with them).
Equity investment is capped at 50 per cent; this means that under Fund E, the investments in equities can not go beyond 50%.
What is the default option or auto choice?
Please note investors have also been given an option to opt for auto choice. In this choice, allocation to the three asset classes is done automatically in a predefined proportion based on the investor's age. The default option, called auto choice lifecycle fund, will see the investment mix change according to the age of the subscriber. Here is how it works:
- At the lowest entry age of 18 years, auto choice entails an investment of 50 per cent in E, 30 per cent in C and 20 per cent in G.
- The ratios will remain unchanged till the subscriber turns 36, when the ratio of investment in E and C will decrease annually, while the proportion of G rises.
- By the time the subscriber is 55 years, G will account for 80 per cent of the corpus, while the share of E and C will fall to 10 per cent each.
Who decides about the Fund Managers?
At the moment, the Pension Fund Regulatory and Development Authority (PFRDA) has selected six fund managers — State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance — on the basis of a bidding and technical evaluation process. The investor has to select one fund manager at the time of deciding his / her investment option. One can also shift from one fund manager to another from May 2010.
How to Exit from the scheme?
- The normal retirement age has been fixed at 60 years.
- At 60, investor will be required to use at least 40 per cent of his/ her accumulated savings to buy a life annuity from an insurance company.
- A phased withdrawal is also allowed but the lump sum benefit has to be availed of before one turns 70 years.
How to prematurely exit from the scheme?
- For those looking to exit before turning 60, there is an option to withdraw 20 per cent of the accumulated savings but buy an annuity with the remaining 80 per cent.
What if the subscriber dies before he/ she turns 60?
If the subscriber dies before he or she turns 60, the nominee can receive the entire pension corpus.
What are alternate ways to exit?
Alternatively, a subscriber can exit if the account value falls to zero or if the citizenship status changes.
What are the tax benefits for NPS?
- At present, the investment is covered under section 80CCD of the Income Tax Act and a tax will be levied if subscriber withdraws the money.
- One can avoid paying tax by transferring the entire corpus to the annuity service provider.
- PFRDA has, however, approached the government to treat investment in NPS on a par with instruments like Employees Provident Fund and Public Provident Fund, for which no tax is levied at the investment, accumulation or withdrawal stage.
What is Concept of Tier-I and Tier-II?
The architecture of NPS makes it difficult to withdraw subscribers money during his / her working years or till the age of 60 in this case.
Tier I and Tier II are two options under the scheme where the subscribers can invest their money; the primary difference between them is how they differ in allowing subscribers to withdraw their money before retirement.
Contribution to Tier-I is mandatory for all Government servants joining Government service on or after 1-1-2004 (except the armed forces in the first stage), Whereas Tier-II will be optional and at the discretion of Government servants.
- In Tier-I, a Government servant will have to make a contribution of 10% of his basic pay plus DA, which will be deducted from his salary bill every month by the PAO concerned.
- The Government will make an equal matching contribution.
- However, there will be no contribution from the Government in respect of individuals who are not Government employees.
- Tier-I contributions (and the investment returns) will be kept in a non-withdrawable Pension Tier-I Account.
- Tier-II contributions will be kept in a separate account that will be withdrawable at the option of the Government servant. Government will not make any contribution to Tier-II account.
Now we simplify these as follows:
- Tier-I account: One shall contribute his / her savings for retirement into this non-withdrawable account. Government contributes.
- Tier-II account: This is a voluntary savings facility. One will be free to withdraw his / her savings from this account whenever he / she wishes. Government does NOT contribute.
The above discussion was about the Government employees. Please note that while Tier-I account is available from May 1, 2009, the facility of Tier II account is offered from December 1, 2009 to all citizens of India including Government employees mandatorily covered by NPS.
PFRDA has also introduced a low cost version of NPS known as NPS-Lite for economically disadvantaged citizens under which institutions known as Aggregators would be responsible for enrolment under the NPS and collection and transmission of funds to the NPS fund managers. Under the NPS-Lite, all PoPs are automatically eligible to be registered as Aggregators. Since its introduction on 1st May, 2009, the enrolments under NPS have shown a slow but steady progress.
Features of NPS Lite:
- Focus: Economically disadvantaged sections of the society and marginal investors
- Voluntary Scheme: The NPS lite is open to eligible citizens of India, in the age group of 18–60 years. Subscriber is free to choose the amount he/she wants to invest every year.
- Eligible individuals in the unorganized work force can open an account through their Aggregator and get an Individual subscriber (NPS – Lite) Account.
- Regulation: Regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
- Minimum amount required: Ultra-low cost structure with no minimum amount required per annum or per contribution.
- Portable – Subscriber can operate account from anywhere in the country, even with change of location, employment or Aggregator.
A new initiative, Swavalamban Scheme to encourage people from unorganized sector to join New Pension System was launched in 2010-11. Under this scheme, those who join the NPS with a minimum contribution of Rs 1000 and a maximum contribution of Rs 12000 per annum during financial year 2010-11, the government will contribute Rs 1000 per year to each NPS account opened in 2010-11. The scheme is aimed at encouraging the people from unorganized sector to voluntarily save for their retirement by enrolling themselves under the New Pension System (NPS).
- Under this scheme, Government of India contributes Rs 1000 per annum per NFS account in each year -- during the current year and the next three years -- provided the subscriber contributes any amount between Rs 1000 to Rs 12,000 per annum.
- This is a voluntary defined contribution scheme, which any citizen of the country in the unorganized
sector can join.
- The scheme is managed by PFRDA and the Government will release its contribution to PFRDA for crediting the same to the NPS accounts of eligible subscribers.
The government contribution in this scheme is subject to below mentioned conditions:
Subscriber is not covered under employer assisted retirement benefit scheme and also not covered by social security schemes under any of the following laws:
- Employee Provident Fund and Miscellaneous Provision Act, 1952
- The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948
- The Seamen's Provident Fund Act, 1966
- The Assam Tea Plantation Provident Fund and Pension Fund Scheme Act, 1955
- The Jammu & Kashmir Employee Provident Fund Act, 1961
Subscriber contribution in NPS is minimum Rs. 1000 and maximum Rs.12000 per annum, for both Tier1 and Tier II taken together, provided subscriber makes minimum contribution of Rs.1000 per annum to his Tier 1 account.
What to get after 60 years?
On attaining the Normal Retirement Age (NRA) of 60 years – subscriber will be required to compulsorily annuitize at least 40% of his / her pension wealth and the remaining 60% can be withdrawn as a lump sum or in a phased manner; in case, he / she opts for a phased withdrawal:
- Minimum 10% of the pension wealth should be withdrawn every year.
- Any amount lying to the credit at the age 70 should be compulsorily withdrawn in lump sum.
- Withdrawal of amount at any point in time before 60 years of age:
If subscriber withdraws money before attaining 60 years, he/ she would be required to invest at least 80% of the pension wealth to purchase a life annuity from any IRDA – regulated life insurance company. Rest 20% of the pension wealth may be withdrawn as lump sum.
Withdrawal on attaining the Age of 60 years and up to 70 years of age:
The subscriber would be required to invest minimum 40 percent of his / her accumulated savings (pension wealth) to purchase a life annuity from any IRDA-regulated life insurance company. He/ she may choose to purchase an annuity for an amount greater than 40 percent. The remaining pension wealth can either be withdrawn in a lump sum on attaining the age of 60 or in a phased manner, between age 60 and 70, at the option of the subscriber.
If there is death of the subscriber?
In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum. However, if the nominee wishes to continue with the NPS, he/she shall have to subscribe to NPS individually after following due KYC procedure.
PFRDA has allowed investors in the New Pension Scheme (NPS) to opt for ‘deferred withdrawal’ of their money at the time of exit, as against the current practice of ‘phased withdrawal’. This would be a better option than forcing subscribers to choose a certain percentage each and every year while opting for the ‘phased withdrawal’ option, including the year in which they are exiting the system.