National Pension Scheme (NPS)

The New Pension Scheme (NPS) was launched on May 1, 2009, by Government of India for all the citizens through PFRDA – Pension Fund Regulatory and Development Authority of India.

The NPS architecture consists of the NPS Trust, Central Record keeping Agency, Pension Fund Managers, Trustee Bank, and Custodian.

The NPS architecture was made operational for Central Government employees from April 1, 2008. The NPS architecture has also been offered to the State Governments to manage the pension corpus of their employees. As many as 22 State Governments are at different stages of adopting the NPS.

The NPS has been in operation for over 6 years now total assets under management of the NPS currently stands at Rs 87,000 crore and 94 lakh subscribers invested in it.  For returns, check https://www.valueresearchonline.com/NPS/

PFRDA has appointed 22 Points of Presence (PoPs) and 6 Pension Fund Managers for offering NPS to citizens.

The current NPS has both tier I and tier II. The typical feature of tier I type plan is that it does not allow to make any withdrawals before 60 years. However, there can be exceptions. The tier II type of fund which will have no lock in is also available (which is essentially like a MF).

Pension Fund Managers will manage 3 separate schemes, each investing in a different asset class. These assets classes are equity (E), government securities (G) and credit risk bearing fixed income instruments (C). However investment by an NPS participant in equity would be subject to a cap of 50% and the fund managers will be able to invest only in index funds that replicate either BSE Sensex index or NSE Nifty 50 index. The subscriber will have the option to actively decide as to how the NPS pension wealth is to be invested in these 3 asset classes or can also go for an ‘auto choice’ option. In this option the investment will be determined by a predefined portfolio.

Minimum contribution is Rs 6,000 annually and minimum of 4 payments per year (minimum 4 payments totalling a minimum of 6000) and there is no maximum limit.

The minimum age to enter the scheme is 18 years and the maximum is 55 years.

The best thing about this scheme is the fund management charge is a bare minimum of 0.0009% (amazing but true) and that is much cost effective than the mutual funds or unit linked insurance companies charge (which range from 1.5% to 2.5%).

Costs: The application form will cost Rs 40 (maximum) and for every transaction Rs 20. Switching from one fund to another will cost Rs 20. However, one switch every year is permissible. Apart from this, Rs 350 has to be paid as annual maintenance charge to National Securities Depository Ltd. (NSDL), which is the central record keeping agency for all the individual pension accounts (the charge is similar to demat account).

Tax benefits: National Pension Scheme will have tax benefits under Section 80C up to Rs 1 lakh annually.

Pay outs: Payments will be made once age 60 years is attained. A part of the invested money will be paid out as lump sum (maxm of 60%), and the balance will be kept back as annuity. This annuity will be paid out as pension. In case of untimely death, the nominee will receive this amount.

Exit age: One has to compulsorily exit the system on or before attaining the age of 70 (this clearly is an disadvantage as people live much longer these days).

Advantages of NPS:

1. Unlike the traditional retirement products, such as PPF and EPF; NPS is not a defined benefit (no fixed returns), but rather a defined contribution plan. Thus, while investment in PPF and EPF attract a fixed rate of interest, returns from NPS will be market determined. NPS is a better choice since EPF/PPF gives 8% interest rate, but in NPS one can get better returns because of the equity portfolio of the scheme.

2 Comparing with other pension funds, like from private insurance companies, the charges of NPS is much less so the ultimate return will be more. NPS is also transparent and cost effective system wherein the pension contributions are invested in the pension fund schemes and the subscribers will be able to know the value of the investment on day to day basis.

3. It is simple - All the subscriber has to do, is to open an account with his/her nodal office and get a Permanent Retirement Account Number (PRAN).

4. It is regulated by PFRDA with transparent investment norms & regular monitoring and performance review of fund managers by NPS Trust.

4. In the new draft tax code coming up in 2011 only life insurance and pension funds will have the EEE status (exempt, exempt, exempt) and even PPF will be EET.

Summary: NPS has been made in the lines of the “401K plans” of the US, and as the corpus grows PFRDA will bring in more options apart from the 3 funds that are available now. NPS is not yet popular because NPS does not give commission to any agents and thus nobody promotes NPS and the awareness is much less among the general public and in fact the agents try to sell other pension products or ULIPS rather than NPS (because of the heavy commissions on the ULIP based retirement plans).

From current FY, Finance Minister Arun Jaitley introduced an additional income tax deduction of Rs. 50,000 for contribution to the New Pension Scheme (NPS) under Section 80CCD. 

According to me, NPS is the best retirement solution available and NPS should be in one's portfolio along with EPF/PPF and equities (direct and MF) to maintain financial independence even after retirement.