What is NPS?

The NPS (New Pension Scheme) came into operation with effect from 1 January 2004 and was made applicable to all new employees to Central Government service, except to Armed Forces, joining Government service on or after 1 January 2004.

On 1 May, 2009 Govt extended to all Indian citizens to give people a way to get a pension during their old age.

In NPS you can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime. It will work almost the same way as Private Pension Schemes.

Who can invest in NPS?

An Indian citizen age between 18 to 55 can invest in NPS. And an NRI also can open the NPS account if she/he has and Indian bank account under purview of RBI guidelines and FEMA.

Who can not invest/subscribe in NPS?

  1. Insolvent person
  2. Individual of unsound mind
  3. Pre-existing account holders under NPS
  4. Person under 18 years of age (Minor)

What are the minimum and maximum investments in NPS?

Minimum limit is Rs. 6,000 per year (Rs. 500 per month). However there is no upper limit on the maximum contribution per year.

What are the different types of NPS accounts?

Tier I account: This is a non-withdrawable account wherein you will not be able to withdraw your funds until you attain the normal retirement age of 60 years. To withdraw from your Tier I account at any time before 60 years of age, you would be required to invest atleast 80% of your pension wealth to purchase a life annuity from any IRDA – regulated life insurance company. You may withdraw the remaining 20% of your pension wealth as a lumpsum.

Tier II account: To open this account, you should have an active Tier I account. This is a voluntary savings facility. You will be free to withdraw your savings from this account whenever you wish.

  1. Govt servants appointed after 01 Jan 2004 are eligible only for Tier II activation (since they are already covered under NPS, and having Tier I account).
  2. Govt servants appointed prior to 01 Jan 2004 & other citizens can open both Tier-I and Tier-II NPS accounts.
  3. Only Tier –II account cannot be opened without Tier-I account.

What all authorities involve in NPS?

ACCUMULATION PHASE:

Central Record Keeping Agency (CRA): For maintaining the database and corpus details of Individuals and would also allot the Permanent Retirement Account No. (PRAN) and Telephone PIN (T-PIN) to the investor. Presently, NSDL is chosen as the CRA.

Custodians: The Authority who would be actually maintaining the Assets.

Pension Fund Managers (PFM): The people who would actually manage the Funds and take the investment decisions. Presently there are six Mutual Fund Co.s chosen for this purpose (each a special subsidiary of the main Co. created exclusively for managing the Pension Funds),

  1. SBI Pension Funds Private Limited.
  2. UTI Retirement Solutions Limited.
  3. ICICI Prudential Pension Funds Management Company Limited.
  4. Religare Pension Fund Limited.
  5. IDFC Pension Funds Management Company Limited.
  6. Kotak Mahindra Pension Fund Limited.

The Investor has the option (once a year) to make the switch from one Fund Manager to another.

Point Of Presence (POP): These processes shall be carried out through the entities known as Points of Presence (POPs) appointed by the PFRDA. The following entities have been approved by PFRDA for appointment as Points of Presence (POPs) under the New Pension System for all citizens other than Government employees covered under NPS.

  1. Allahabad Bank
  2. Axis Bank Ltd
  3. Bajaj Allianz General Insurance Co Ltd.
  4. Central Bank of India
  5. Citibank N.A.
  6. Computer Age Management Services Private Limited.
  7. ICICI Bank Ltd.
  8. IDBI Bank Ltd.
  9. IL&FS Securities Services Ltd.
  10. Kotak Mahindra Bank Limited.
  11. LIC of India
  12. Oriental Bank of Commerce
  13. Reliance Capital Ltd.
  14. State Bank of Bikaner & Jaipur
  15. State Bank of Hyderabad
  16. State Bank of India.
  17. State Bank of Indore
  18. State Bank of Mysore
  19. State Bank of Patiala
  20. State Bank of Travancore
  21. The South Indian Bank Ltd
  22. Union Bank of India
  23. UTI Asset Management Company Ltd.

Trustee Bank: The back end Bank facilitating transfer of funds from POP to PFM. The trust holds an account with as the NPS Trustee Bank, i.e. Bank of India. NPS Trustee Bank facilitates fund transfers across various entities of NPS system viz. PFM, Annuity Service Providers, subscriber, etc. The NPS Trust is being administered by the Board of Trustees, as constituted by the PFRDA.

ANNUITY PHASE:   Annuity Service Provider (ASP): The Life Insurance Company who would provide the monthly annuity based pension. The Investor is required to compulsorily hand over 40% of the corpus as available at the age of 60 years. He/she can also purchase annuity upto 100% of the corpus.

Service Charges:

Intermediary
Charges Head
Services Charges
Mode of Deduction
CRA
PRAN Opening Charge
50
Through Cancellation of Units
Annual PRAN Maintenance Cost Per Account
280
Charges Per Transaction
6
POP(Maximum Permissible Charge for each   subscriber)
Initial Subscriber Registration &   contribution upload
40
To Be Collected Upfront
Any Subsequent Transaction
20
Trust Bank
Per Transaction emanating From RBI Location
Zero
Through NAV Deduction
Per Transaction emanating From Non-RBI   Location
15
Custodian (On Asset Value in Custody)
Asset Servicing Charges
0.0075% p.a For Electronic Segment &   0.05% p.a. For Physical Segment
Through NAV Deduction
PFM Charges
Investment Management Fee
0.0009%
Through NAV Deduction
*There are no additional CRA charges for the   maintenance of Tier II account.

What investment choice does the subscriber have?

The NPS offers you two approaches to invest your money

Active choice – Individual Funds (Asset Class E, Asset Class C, and Asset Class G)

  1. Asset Class E: – investments in predominantly equity market instrument (maximum 50% can be allocated of the investment amount)
  2. Asset Class C: – investments in fixed income instrument other than Government securities.
  3. Asset Class G: – investments in Government securities.

Auto choice – Lifecycle Fund

Here the investment allocation will be done based of investor’s age. In this scheme, equity portion (Asset class E) will be 50 per cent till age 35 after which it will reduce 2 per cent per year until it becomes 10% by age 55. Credit risk portion (Asset class C) will be 30 per cent till age 35 after which it will reduce 1 per cent per year until it becomes 10% by age 55.

What is the Income Tax Treatment?

You will get the 80C benefits on the amount invested in NPS, but the bad part is that the returns will be fully taxable not like EPF and PPF. It will come under Exempt-Exempt-Taxed (EET) which may be a drawback of the plan i.e. the amount would be taxed at the time of withdrawal. But the good part is it will not attract any Security Transaction Tax (STT) and Dividend Distribution Tax (DDT).

Who Regulates NPS?

Just like SEBI for Stock Market, NPS is being regulated and monitored by PFRDA (Pension Fund Regulatory and Development Authority)

Process note to Apply for NPS:

  1. You would be required to go to your nearest POP – SP (Service Provider).
  2. You need to duly fill in the subscriber registration form and attach the prescribed documents before submitting it to the authorized person at the POP – SP (The list of POP – SPs shall be available at the PFRDA website www.pfrda.org.in and the website of the concerned POP).
  3. You should comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form. The Subscriber Registration form attached with this Offer Document should be duly filled-in by the applicant and all terms and conditions mentioned therein should be duly complied with. All the documents required for KYC compliance need to be mandatorily submitted.
  4. Upon registration, you shall receive the PRAN from CRA through mail.
  5. After sending PRAN, CRA will send I-PIN and T-PIN through mail.
  6. Thereon, you can make minimum contributions of Rs. 500 per transaction and Rs. 6,000 per year. As stated above there is no upper limit on the maximum contribution per year.
National Pension Scheme (NPS) with Complete Process Note

2 thoughts on “National Pension Scheme (NPS) with Complete Process Note

  • February 12, 2015 at 5:37 PM
    Permalink

    Dear BP,

    Can you elaborate more on this scheme or send me the more details on NPS investment as well as the tax benefit if any apart for regular 80C Investment of 1.5 Lakcs

    Regards

    Vishal Setia

    Reply
    • February 12, 2015 at 9:32 PM
      Permalink

      Hi Vishal,

      You may refer this post for complete details about NPS. In case you have any specific query do let me know.

      Reply

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