National Pension System- A Retirement Planning Tool
NATIONAL PENSION SYSTEM
National Pension System
Government of India established Pension Fund Regulatory and Development Authority (PFRDA) on 10th October, 2003 to develop and regulate pension sector in the country.The National Pension System (NPS) was launched on 1st January, 2004 with the objective of providing retirement income to all the citizens. NPS aims to institute pension reforms and to inculcate the habit of saving for retirement amongst the citizens.Initially, NPS was introduced for the new government recruits (except armed forces). With effect from 1st May, 2009, NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis.
Additionally, to encourage people from the unorganised sector to voluntarily save for their retirement the Central Government launched a co-contributory pension scheme,'Swavalamban Scheme in the Union Budget of 2010-11. Under Swavalamban Scheme, the government will contribute a sum of Rs.1,000 to each eligible NPS subscriber who contributes a minimum of Rs.1,000 and maximum Rs.12,000 per annum. This scheme is presently applicable upto F.Y.2016-17. The swavalamban scheme has been now replaced by Atal Pension Yojana.
NPS offers following important features to help subscriber save for retirement:
- The subscriber will be allotted a unique Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber's life. This unique PRAN can be used from any location in India.
PRAN will provide access to two personal accounts:
- Tier I Account: This is a non-withdrawable account meant for savings for retirement
- Tier II Account: This is simply a voluntary savings facility. The subscriber is free to withdraw savings from this account whenever subscriber wishes. No tax benefit is available on this account.
NPS ARCHITECTURE-
NPS architecture consists of NPS Trust which is
entrusted with safeguarding subscribers interests, a Central Recordkeeping Agency (CRA) which maintains the data and records, Point
of Presence (POP) and aggregators as collection and distribution arms,
competing pension fund managers
for generating and maximizing returns
on investments of subscribers, custodian to take care of the assets
purchased by the Fund managers and Trustee bank to manage the banking
operations.
Pension Fund Regulatory and
Development Authority (PFRDA) : Pension
Fund Regulatory and Development
Authority (PFRDA)- is an
autonomous body set up by the Government of India to develop and regulate the pension market
in India.
Point of Presence (POP)
: Points of Presence (POPs)
are the first points of interaction of the NPS subscriber with the NPS architecture. The authorized branches
of a POP, called Point
of Presence Service Providers (POP-SPs), will act as collection points
and extend a number of customer services
to NPS subscribers. The
Pension Fund Regulatory and Development Authority (PFRDA)- has authorized 58 institutions including
public sector banks, private banks
, private financial institutions and the Department of
Posts- Points of Presence (POPs) for opening the National Pension
System (NPS) accounts of the citizens.
Central
Recordkeeping Agency (CRA) : The recordkeeping,
administration and customer service functions for all subscribers of
the NPS are being handled by the National
Securities Depository Limited (NSDL)-, which is
acting as the Central Recordkeeper for the NPS.
Annuity Service
Providers (ASPs) : Annuity
Service Providers (ASPs)
would be responsible for delivering a regular monthly
pension to the subscriber after exit from the NPS.
Fund Managers
Funds are managed
by professional Fund Managers from Public & Private sector
with proven track record and as per the PFRDA
approved investment guidelines. At
present there are 7 pension fund managers managing
the pension wealth
of subscribers. They are :
·
HDFC Pension Management Co. Ltd.
·
ICICI Prudential Pension
Fund Management Co. Ltd.
·
Kotak Mahindra Pension
Fund Ltd.
·
LIC Pension Fund Ltd.
·
SBI Pension Funds Pvt. Ltd
·
UTI Retirement Solutions Ltd
·
Birla Sunlife Pension
Management Ltd
Trustee Bank –
Axis Bank, functions
as Trustee Bank.
Custodian-
Stock Holding
Corporation of India Ltd, functions as custodian for NPS.
Who can join NPS?
Central Government Employees
NPS is applicable to all new employees of Central Government service (except Armed Forces) and Central Autonomous Bodies joining Government service on or after 1st January 2004. Any other government employee who is not
mandatorily covered under NPS can also subscribe to NPS under "All Citizen
Model" through a Point of Presence - Service Provider (POP-SP).
State Government Employees
NPS is applicable to all the
employees of State Governments, State Autonomous Bodies joining services after the date of notification by the respective State Governments. Any other government employee who is not mandatorily covered under NPS can
also subscribe to NPS under "All Citizen
Model" through a Point of Presence - Service Provider (POP-SP).
Corporate
A Corporate would have the flexibility to decide investment choice either at
subscriber level or at the corporate
level centrally for all its underlying subscribers. The corporate
or the subscriber can choose
any one of Pension
Fund Managers (PFMs)
available under “All Citizen
Model” and also the percentage in which the funds are allocated in various asset classes.
Individual
All citizens of India between the
age of 18 and 60 years as on the date of submission of his / her application to Point of Presence (POP)
/ Point of Presence-Service Provider (POP-SP) can join NPS.
Unorganised Sector Workers -SwavalambanYojana
A citizen of India between
the age of 18 and 60 years as on the date of submission of his / her application, who belongs to the
unorganized sector or is not in a regular employment of the Central or a state government, or an
autonomous body/ public sector undertaking of the Central or state government, can open NPS -Swavalamban account.
The subscriber of NPS - Swavalamban
account should not be covered under social security scheme like Employees' Provident Fund and miscellaneous
Provisions Act, 1952, The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948, The Seamen's Provident Fund
Act, 1966, The Assam Tea Plantations Provident
Fund and Pension
Fund Scheme Act, 1955 and The Jammu
and Kashmir Employees' Provident Fund Act, 1961.
BENEFITS OF NPS-
Some of the benefits of the National Pension System (NPS) are:
- Dual benefit of
Low Cost and Power of compounding – The account maintenance costs under NPS are the lowest as compared
to similar pension products available in India,
like retirement plans offered by Insurance companies and mutual funds. While saving
for a long-term goal such as retirement, the cost matters a lot. Over 35-40 years,
the charges can shave off a
significant amount from the corpus.
Till the retirement pension wealth accumulation grows
over a period of time with a compounding
effect. The account maintenance charges being low, the benefit of accumulated pension wealth to the subscriber eventually become large.
- A flexible
investment option: Subscribers have
control on the choice of investment made (Active
or Auto Choice) and the Pension funds
who manages the investments. Subscribers can switch from one Pension
fund to another, one investment option to another,
subject to certain regulatory restrictions.
Three Life Cycle funds are available
under this Auto Choice:
(i) LC75
– Aggressive Life Cycle Fund: In this Life Cycle Fund, the
exposure in Equity Investments starts
with 75% till age 35 and gradually
reduces as per the age of the subscriber.
(ii) LC50-
Moderate Life Cycle Fund: In this Life Cycle Fund, the
exposure in Equity Investments starts
with 50% till age 35 and gradually
reduces as per the age of the subscriber.
(iii) LC
25- Conservative life cycle fund: In this Life Cycle Fund, the
exposure in Equity Investments starts
with 25% till age 35 and gradually
reduces as per the age of the subscriber.
The default auto choice if the subscriber is not
choosing any of the above option is Moderate
life Cycle Fund.
- Tax benefit to employee:
Individuals who are employed
and contributing to NPS would
enjoy tax benefits
on their own contributions as well as their employer’s contribution as under:
-
(i)
Employee’s
own contribution -
Eligible for tax deduction up to 10% of Salary
(Basic + DA) under Section 80 CCD(1) within the overall ceiling of Rs.
1.50 lacs under Sec 80 CCE.
(ii)
Employer’s contribution – The employee is eligible for tax deduction up to 10% of Salary (Basic + DA) contributed by
employer under Sec 80 CCD(2) over and above the limit of Rs.
1.50 lacs provided under Sec 80 CCE.
(iii) Tax benefit for self -employed: Eligible for tax deduction up to 20 % of gross income under Sec 80 CCD (1) with in the overall ceiling of Rs. 1.50 lacs under Sec 80 CCE.
Subscriber is allowed deduction in addition to the deduction allowed under Sec. 80CCD(1) for additional contribution in his NPS account subject to maximum investment of Rs. 50,000/- under sec. 80CCD 1(B).
Tax benefits would be applicable as per the Income Tax Act, 1961 as amended from time to time.
- A safe retirement fund: Introduced by the Government of India and regulated by the Pension Fund Regulatory & Development Authority (PFRDA).
- Low Cost - NPS is considered to be the world’s lowest cost pension scheme. Administrative charges and fund management fee are also lowest.
- Simple - All applicant has to do is to open an account with any one of the POPs or select Auto choice to get better returns.
- Portable - Applicant can operate an account from anywhere in the country and can pay contributions through any of the POP-SPs irrespective of the POP-SP branch with whom the applicant is registered , even if he/she changes his/her city, job etc and also make contribution through eNPS. The account can be shifted to any other sector like Government Sector, Corporate Model in case the subscriber gets the employment.
- Prudentially Regulated – Transparent investment norms, regular monitoring and performance review of funds by NPS Trust.
·
All Citizen Model of NPS-
Eligibility
An individual fulfilling the following eligibility criteria can voluntarily join in NPS:-
o Should be an Indian Citizen (resident or non-resident) or an Overseas Citizen of India (OCI)
o Should be aged between 18-65 years
o Compliance of Know Your Customer (KYC) norms detailed in the Application Form
Hindu Undivided Families (HUFs) and Persons of Indian Origin (PIOs) are not eligible for subscribing to NPS.
NPS is an Individual Pension Account and cannot be opened on behalf of a third person. The applicant should be legally competent to execute a contract as per the Indian Contract Act.
Enrollment
An NPS account can be opened through
o Points of Presence (PoP) registered with PFRDA in Online or Physical mode
Point of Presence (PoPs) is the distribution channel and the first point of contact for applicants and subscribers. PoPs are mandated to provide services related to Subscriber Registration (Collection of forms and KYC verification), receiving /uploading contributions, processing subscriber requests for updation of account details, exercising choices, withdrawals, grievances resolution etc.
o Online platform (eNPS) of NPS Trust – http://www.npstrust.org.in/content/open-your- nps-account-online
For generation of an Individual Pension Account under NPS, an applicant is required to submit the completed Subscriber Registration Form (CSRF/NRSF/Online data fields) alongwith the following documents through physical or online mode to the Service Provider (PoP):
For resident Individuals:
a) One Recent Photograph
b) PAN Card
c) Proof of Address
d) Proof for the Bank Account
For NRIs and OCIs
Non-resident Individual (NRI)
Overseas Citizen of India (OCI)
One Recent Photograph
One Recent Photograph
PAN Card
PAN Card
Indian Passport
OCI Card
Proof of address - India
Proof of address - foreign country
Proof for the Bank Account (NRE/NRO)
Proof for the Bank Account (NRE/NRO)
Types of Accounts
Under NPS account there are two types of accounts – Tier I & Tier II.
Tier-I is the Individual Pension Account, which is the default pension account having all the tax incentives under Income Tax Act.
Tier-II is an optional investment account available to a subscriber having an active Tier-I account. This account has no withdrawal restrictions and tax benefits. Tier-II is not a Pension Account.
Tier – I
Tier – II
Individual Pension Account
Optional Account – Require an active Tier-I
Withdrawal as per rules/regulations only
Unrestricted withdrawals
Min. Contribution to open Rs. 500
Min. Contribution to open Rs. 1000
Min. Contribution per year Rs. 1000
Min. Contribution Rs. 250
Tax benefits are available
No tax benefits on contribution/gains
- NRI/OCI having Tier-I account are restricted to activate Tier-II a/c.
- Subscriber can select different Pension Fund and Investment
Option for his/her NPS Tier I and Tier II accounts.
Contribution
A subscriber can make any number of contributions to his/her Tier-I or Tier-II account without any upper limit of amount through any of the following modes:
i. Physical mode – by visiting any of the registered service provider (PoP) and depositing cheque/cash alongwith the NPS contribution slip.
ii. Online mode -
a. Web-based [(i) login to Pension Account (ii) online facility provided by PoPs (iii) eNPS platform of NPS Trust]
b. NPS Mobile Application login
The contributions made by the subscriber will get invested as per the subscriber choice (Pension Fund and Asset allocation) exercised and recorded with CRA.
Investment choices
The NPS contributions made by a subscriber will get invested as per the subscriber choices (Pension Fund and Asset allocation) exercised and recorded with CRA.
The following choices are available to the subscribers:
(A) Selection of Pension Funds:
The subscriber can choose any one of the Pension Funds registered with PFRDA. To see the list of Pension Funds registered with PFRDA please click here.
(B) Investment Choice for Asset Allocation:
The contributions of subscribers are invested by the Pension Funds (chosen by subscriber) in compliance of the investment guidelines prescribed by PFRDA for each Asset Class i.e. Equity, Corporate Bonds, Government Securities and Alternate Assets.
An NPS subscriber has the freedom to allocate his/her contributions to different Asset Classes through Active Choice or Auto Choice
Active Choice: Subscriber actively decides on the allocation of funds across:
Asset class E or Equity upto a maximum of 75%
Asset Class C or Corporate Bonds upto a maximum of 100%
Asset Class G or Govt Securities upto a maximum of 100%
Asset Class A or Alternate Assets upto a maximum of 5%
Or
Auto Choice: The funds of the subscriber gets invested across three asset classes (Equity, Corporate Bonds & Government Securities) in pre-determined proportion as per the age of subscriber. The initial allocation across three asset classes remains constant till 35 years of age and thereafter allocation to equity gradually declines every year.
Following are the 03 Life Cycle Funds:
i. Conservative Life Cycle Fund (LC25)
ii. Moderate Life Cycle Fund (LC50) – Default
iii. Aggressive Life Cycle Fund (LC75)
Age
Aggresive Life Cycle
Fund (LC-75)
Moderate Life Cycle
Fund (LC-50)
Conservative Life Cycle
Fund (LC-25)
Asset Class (%)
Asset Class (%)
Asset Class(%)
E
C
G
E
C
G
E
C
G
Upto 35
years
75
10
15
50
30
20
25
45
30
Upto 36
years
71
11
18
48
29
23
24
43
33
Upto 37
years
67
12
21
46
28
26
23
41
36
Upto 38
years
63
13
24
44
27
29
22
39
39
Upto 39
years
59
14
27
42
26
32
21
37
42
Upto 40
years
55
15
30
40
25
35
20
35
45
Upto 41
years
51
16
33
38
24
38
19
33
48
Upto 42
years
47
17
36
36
23
41
18
31
51
Upto 43
years
43
18
39
34
22
44
17
29
54
Upto 44
years
39
19
42
32
21
47
16
27
57
Upto 45
years
35
20
45
30
20
50
15
25
60
Upto 46
years
32
20
48
28
19
53
14
23
63
Upto 47
years
29
20
51
26
18
56
13
21
66
Upto 48
years
26
20
54
24
17
59
12
19
69
Upto 49
years
23
20
57
22
16
62
11
17
72
Upto 50
years
20
20
60
20
15
65
10
15
75
Upto 51
years
19
18
63
18
14
68
9
13
78
Upto 52
years
18
16
66
16
13
71
8
11
81
Upto 53
years
17
14
69
14
12
74
7
9
84
Upto 54
years
16
12
72
12
11
77
6
7
87
Upto 55
years
15
10
75
10
10
80
5
5
90
For detailed investment guidelines refer to the
Circular Section of PFRDA website .
Withdrawal/Exit
Withdrawal/Exit from NPS Tier-I Account is subject to the following conditions:
(i) Partial Withdrawal - after completion of 3 years subscriber can withdraw 25% of his/her own contributions for specific reasons viz illness, disability, education or marriage of children, purchasing property, starting a new venture. A subscriber can partially withdraw upto a maximum of 3 times during his/her entire tenure in NPS.
(ii) Premature Withdrawal - after completion of 10 years or before completion of 03 years (if subscriber has joined NPS after 60 years of age), subscriber can withdraw maximum 20% of the corpus as lumpsum and minimum 80% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension. If the accumulated corpus is less than Rs 1 lakh, the entire corpus is paid as lumpsum to the subscriber.
(iii) Normal Withdrawal – on completion of 60 years of age (if subscriber has joined NPS before 60 years of age) or after completion of 03 years (if subscriber has joined NPS after 60 years of age), subscriber can withdraw maximum 60% of the corpus as lumpsum and minimum 40% of the corpus has to be utilized for purchasing an annuity plan for receiving the pension. If the accumulated corpus is less than Rs 2 lakhs, the entire corpus is paid as lumpsum to the subscriber.
Subscriber also has the option to:
(a) Continue in NPS till the age of 70 years or exit any time after such continuance before 70 years.
(b) While exiting from NPS, subscriber can;
▪ defer receiving the lumpsum (60% corpus) till the age of 70 years or withdraw the same in installments till 70 years
▪ defer Annuity purchase (40% corpus) for a maximum period of 3 years.
In case of unfortunate event of death of a subscriber, the nominee/legal heir can withdraw the entire accumulated corpus. The nominee / family members of the deceased subscriber can also purchase annuity, if they so desire.
Withdrawal/Exit from NPS Tier-II Account is unrestricted and will be compulsorily closed upon closure of Tier-I Account.
PRAN (Permanent Retirement Account No)-
The PRAN or Permanent Retirement Account Number is a unique 12 digit number that identifies those individuals who have registered themselves under the National Pension Scheme (NPS). After allocation of PRAN, the NPS subscribers have an option of receiving a physical copy of their PRAN on a PRAN card. Since the PRAN card serves as the unique identifier for an NPS subscriber, a PRAN once allocated cannot be changed for the subscriber throughout his/her life.
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