What is NPS?
NPS is a voluntary pension scheme launched by PFRDA with an objective to provide pension to people in both the organized and unorganized sectors. Unlike employees’ provident fund or PPF, NPS gives its investors greater control and flexibility and that too at very low cost. And to top it all, the money is actually managed by professional money managers.
Who can invest?
An Indian citizen who is above 18 years of age and below 60 years of age can invest in NPS.
How does NPS work?
The Point of Presence (POP) is the link between the investor and NPS; they are responsible for selling and marketing of NPS. A list of various points of presence is available on PFRDA website.
The investor can approach nearest POP-SP, fill in the required forms and submit it along with other requisite documents.
The investor has to then decide the account type, the fund managers and the approach to investment:
Account Type
The investor has to decide the proportion of investments that shall be made to Tier-1 account and Tier-2 account.
A Tier-1 account is the default account that is mandatory for investing in NPS. In addition to the Tier-1 account, the investor can open a Tier-2 account. Withdrawals from Tier-1 account are subject to restrictions but Tier-2 account is comparatively more liquid. A minimum sum of Rs.6000 has to be invested each year in Tier-1 account.
Opening an active Tier-1 account is a pre-requisite to open a Tier-2 account. There are no extra charges for opening a Tier-2 account but a minimum account balance of Rs. 2000 has to be maintained at the end of every financial year.
The following are differentiating features of Tier-1 and Tier-2 account.
|
Basis |
Tier-1 |
Tier-2 |
|
Minimum amount per contribution |
Rs.500 |
Rs.250 |
|
Minimum number of contributions |
1 per year |
1 per year |
|
Mandatory |
Yes |
No |
There is no limit on the maximum amount that an investor can contribute in a year or the maximum number of contributions during the year.
Fund Managers
The investor has to indicate choice of Pension Fund from the following:
- ICICI Prudential Pension Funds Management Company Limited
- IDFC Pension Fund Management Company Limited
- Kotak Mahindra Pension Fund Limited
- Reliance Capital Pension Fund Limited
- SBI Pension Funds Private Limited
- UTI Retirement Solutions Limited
The investor can switch from one Pension Fund to another Pension Fund.
Approaches for investment
The investor then has to choose an approach for investment between active choice – individual funds (E, C and G Asset classes) and auto choice – lifecycle fund:
Active choice - Individual Funds
Depending upon the risk appetite and return expectation of the investor, the investments can be made to asset classes; equity (E), debt securities other than government securities(C) and government securities. (G), subject to maximum of 50% in equity (E).
Auto choice - Lifecycle Fund
In case the investor choses this option, the investments will be made in a life-cycle fund. Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio, according to the age of the investor. At the lowest age of entry (18 years) 50% of pension wealth will be invested in “E” Class, 30% in “C” Class and 20% in “G” Class. These ratios of investment will remain fixed till the investor reaches the age of 36. From age 36 onwards, the weight in “E” and “C” asset class will decrease annually and the weight in “G” class will increase annually till it reaches 10% in “E”, 10% in “C” and 80% in “G” class at age 55.
The investor who opts for active choice he /she needs to periodically review investment choices, to make sure that the mix chosen is still appropriate for his situation. There is a high probability that ratios might change, considering the volatile nature of the markets.
Net Asset Value (NAV) is released on a regular basis to aid the investor. The investor can change his/her scheme preference once a year any time during the year. Neither the Active Choice nor the Auto Choice provides assured returns.
The investor may have different scheme preferences for Tier-1 and Tier-2 account.
When can the investor withdraw funds?
The sum that can be withdrawn from the pensionable corpus is subject to the age of the investor at the time of withdrawal.
|
Age |
Maximum withdrawal allowed |
|
<60 |
20% |
|
60-70 |
60% |
At the time of withdrawal, balance amount will have to be used to purchase an annuity from any IRDA – regulated life insurance company. The withdrawal can be a lump sum or in parts as per the choice of the investor. After 70 years of age the account is closed and the sum is transferred to the investors account.
In case of death, option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum.
What are the Tax benefits with respect to NPS?
At present, NPS allows a tax deduction under section 80CCD (2) which gives the subscriber an opportunity to get a tax deduction beyond the section 80C and 80CCF. It has an EET status.
With implementation of the new direct tax code, the NPS is expected to get EEE status, which will make it an even more attractive proposition.
Why NPS did not click? What is in it for the seller?
The initial incentive structure was too low to enthuse the distributors, hence the product could not pick up even though it had many attractive features. To overcome this challenge, PFRDA has brought in changes in the payment structure. With effect from 16th January 2012 the flat payment structure has been replaced with equitable structure that will charge fee on basis of value of transaction. The revision in the payment structure makes it attractive for distributors to sell NPS.
The new payment structure is:
1. An Initial subscriber registration charge of Rs.100/- and a charge of 0.25% of the initial contribution amount from subscriber subject to a minimum of Rs. 20 and a maximum of Rs.25,000.
2. Any subsequent transaction involving contribution upload – 0.25% of the amount subscribed by the NPS subscriber, subject to minimum of Rs. 20/- and a maximum of Rs. 25000.
3. Any other transaction not involving a contribution from subscriber – Rs. 20.
The above charges are negotiable but within the prescribed charge structure. Each transaction in Tier-2 account will be charged as per the charge structure of Tier-1 account.
The NPS is being pushed by the government in a big way. It is a very good product from point of view of the investor and fresh steps are being made to make it lucrative even from selling point of view. The DTC in particular is set to bring in a lot positive news in this regard. The distributors should be active and take the first mover advantage to make the most of the opportunity.