All About National Pension Scheme (NPS)

What is National Pension System (NPS)?

National Pension Scheme (NPS) is a pension scheme sponsored by the Indian Government. Initially this pension scheme was launched for the government employees in 2004. But from 2009, this pension scheme is opened for all sections. Under this scheme, a subscriber can regularly contribute a fixed amount in the form of a pension account during his employment period. After the retirement from the job, the subscriber can withdraw a certain part of the collected money in a lump sum account. To earn a regular income, after the retirement, the subscriber used the remaining collected amount to purchase an annuity.

The national pension scheme of SBI is one of the highly economical government supported pension scheme in the age group 18-65 for the Indian citizens. Pension Fund Regulatory and Development Authority launch this scheme. The annual minimum contribution for this scheme is Rs. Six thousand only. You can pay this amount either in lump sum as one single payment or in installment of rupees five hundred every month.

National Pension Scheme is one of the most economical linked market retirement plan as compared to various other retirement plans i.e. Mutual Funds, PPF, and EPF.

For those funds, which are non-government, the fees of fund management are increased 0.25% and for those funds, which are government, the fees are increased 0.0102 %. The POPs can charge rupees hundred plus 0.25% of the investment.

Eligibility Criteria to Join National Pension Scheme (NPS)

Any individual citizen of India (both resident and Non-resident) in the age group of 18-60 years can join National Pension Scheme (NPS). The only condition is that person must comply with KYC (Know your customer) norms.

Types of National Pension Scheme

NPS provides you two types of accounts: Tier I and Tier II. Tier I is mandatory retirement account, whereas Tier II is a voluntary saving Account associated with your PRAN.

Tier I Account

• It is a basic account of pension with some restrictions on withdrawal.
• Before reaching the age of sixty years, you can withdraw only twenty percent of your contribution. While the remaining eighty percent have to be compulsory used for purchasing the annuity from a life insurer. The series of payments made at regular durations of time is called annuity.
• After reaching the age of sixty years (retirement age), you can withdraw the sixty percent of the contribution, and the remaining forty percent contribution can be used to buy the annuity from authorized life insurers.

Tier II Account

• It is a voluntary alternative of saving, from which a person can withdraw the money anytime.
• Remember, you cannot open multiple NPS accounts. In fact, there is no need to open a second account, as NPS is portable across sectors and locations.

National Pension Scheme Fund Managers

Organization or individual takes the decision of investing in portfolios (insurance fund, pension fund or mutual fund) according to the pre-defined objectives of the fund. While opening the account, it is essential to choose a fund manager. PFRDA appoints the seven fund managers, who managed the money.

The accounts of government employees are managed by three government fund managers, i.e. UTI Retirement Solutions, SBI Pension Plan, and LIC Pension Plan. Six fund managers manage the money invested by the others. These six fund managers are UTI Retirement Solutions, SBI Pension Funds, Reliance Capital Pension, Kotak Mahindra Pension, IDFC Pension, and ICICI Prudential Pension.

Features of Tier I Account

• If the fund is government, the employee contributes ten percent of basic salary with dearness allowance, with exactly the employer also contributes the similar amount.
• If the fund is non-government, six thousand rupees were paid by the investors, with the option of pay rupees five hundred every installment.
• If the fund is government, the default investment is made in government and corporate bonds.
• If the fund is non-government, the default investment is made in liquid funds, Fixed deposits, government funds, corporate bonds, and stocks.

Features of Tier II Account

• During the account opening time, the contribution is Rs. One thousand. Or minimum deposit of Rs. 250/- per month can also be selected. It is essential to maintain a minimum balance of rupees two thousand after the end of the financial year.
• The investment is a mix of liquid funds, FDs, government funds, corporate bonds, and equity.

Advantages of National Pension Scheme (NPS)

• For the tax deduction, the personal contribution of an employee is eligible. It is ten percent of the basic salary and dearness allowance.
• According to the section 80 CCD of the income tax act, the entire ceiling of rupees one lakhs and fifty thousand is allowed under the sections 80 CCE and 80 C.
• Under the section 80 CCD (2), contribution to the NPS by the employer is exempted
• Under the section 80 CCD (1B), individuals can claim extra deduction of rupees fifty thousand. Under the section 80 C, this is permitted for Rs. One lakhs and fifty thousand
• Under the section 80 CCD (1), A person who is self-employed, can contribute up to ten percent of his gross total income.

The finance bill 2011-12 will allows deduction of tax on contributions up to ten percent of basic salary and dearness allowance paid by an employer for the national pension scheme (NPS) account of an employee under the section 80CCE. This is higher than the limit of rupees one lakhs and is applicable only if the employer made the contribution. This is one of the main reason that corporate groups are liking the concept of NPS.

For the non-government funds, the fee of fund management has been increased from 0.0009 % of the assets managed to 0.25%. For the government funds, the fee has been modified to 0.0102 from April this year. POPs are permitted to charge rupees hundred plus 0.25 % of the total amount invested. Prior to this, the fee is rupees twenty.

Disadvantages of National Pension Scheme (NPS)

As per the current rules, around sixty percent deposit on maturity could be withdrawn while the remaining 40% can be used to purchasing the annuity. Currently, annuity insurance plans based returns are not tax-free. To exempt the NPS funds from the tax during withdrawal, the direct tax code makes plans. The tax during the withdrawal is an obstacle in making the NPS the top pension scheme.

Another problem is restrictions during the withdrawal from the Tier – I account, the pensions saving primary account. After the maturity, you can withdraw only the sixty percent of the funds, the remaining forty percent can be used to purchase the annuity. Tax is not exempted on such returns.

Also, the annuity has to be purchased from one of the six PFRDA authorized insurers. Alternatives to select from the number of annuity providers are few as the LIC have the seventy percent share in the market.

The portfolios of NPS are restricted to more than fifty percent equity exposure. Those people who are in their twenty’s or thirty’s, this scheme is a loss of money. Over longer periods, the equity has display to provide twelve to fifteen percent return each year. NPS is much better as compared to the traditional schemes of retirement.

NPs is good than most of its competitors such as mutual funds and EPS. In performance and costs, NPS scores better.

But the forty percent essential investments in equity after reaching the retirement age, fifty percent cap on exposure of equity, and taxation on returns of annuity does make NPS not a good option.

Costs and performance are good features of NPS. But it is the investor who has the final say.

How to join NPS?

Join NPS by visiting POP-SP (Offline Process)

Step 1 - Procure your Permanent Retirement Account Number (PRAN) application form

As a subscriber (age between 18 to 60 years), you can procure your Permanent Retirement Account Number (PRAN) application form from any of POP-SP you wish to register with.

Your application form should be filled up with photograph, signature, mandatory details, scheme preference details etc and also submit KYC documentation with respect to proof of identity and proof of address.

Step 2 - Submit PRAN application form to your nearest Point Of Presence - Service Provider (POP-SP)

You have to visit your nearest POP-SP and submit the PRAN application along with the KYC documents. PRAN card will be sent to your correspondence address by CRA.

Step 3 - Track your PRAN application

At the time of submission of the PRAN application, POP-SP will give you a receipt number. You can track the status of your PRAN application by entering the receipt number in the following link - https://cra-nsdl.com/CRA/pranCardStatusInput.do

Step 4 - Submit your first Contribution Slip

You are required to make your first contribution (minimum of Rs 500) at the time of applying for registration to any Point Of Presence - Service Provider (POP-SP). For this, you will have to submit NCIS mentioning the details of the payment made towards your PRAN account.

Join NPS through eNPS (Online Process)

Registration using Permanent Account Number (PAN)

You can register for NPS using PAN number and KYC verification will be done by Bank/Non Bank POP. To join NPS online,

• You must have a Permanent Account Number (PAN)
• Bank/Demat/Folio account details with the empanelled Bank/Non-Bank for KYC verification for subscriber registration through eNPS3.
• Name and address provided during registration should match with POP records for KYC verification. If the details don't match, the request is liable for rejection. In case of rejection of KYC by the selected POP, the applicant is requested to contact the POP.
• You need to fill up the mandatory information online.
• You need to upload scanned copy of PAN card and cancelled cheque in *.jpeg/*.jpg/*.png format having file size between 4KB -2MB.
• You need to upload your scanned photograph and signature in *.jpeg/*.jpg/*.png format having file size between 4KB -5MB.
• You will be routed to a payment gateway for making the payment towards your NPS account from Internet Banking.
• Contributions are credited in PRANs on T+2 basis (subject to receipt of clear funds from Payment Gateway Service Provider.

Steps to Join NPS Online

After Permanent Retirement Account Number (PRAN) is allotted, subscriber can use the following option –

Option 1 - eSign

• Select “eSign” option in the eSign /Print & Courier page
• OTP for the purpose of authentication will be sent to your mobile number registered with the Aadhaar
• After Authentication of Aadhaar, Registration form will be successfully eSigned
• Once a document is eSigned, you need not send the physical copy of form to CRA
• eSign service charges plus taxes applicable is Rs. 25.90 (including UIDAI charge of Rs. 20)

Option 2 - Print and Courier

• Select “Print & Courier” option in the eSign /Print & Courier page
• Print out your form, paste your photograph, & affix signature.
• The form should be sent within 30 days from the date of allotment of PRAN to CRA at the following address or else the PRAN will be 'frozen' temporarily