National Pension Scheme – Benefit, Features, Pros & cons

Every society is a mixed population composed of people of different age groups. After contributing to the national economy with his/her skills, a person duly needs assurance of a comfortable life, post-retirement. We have seen the propensity of developed countries of the world to create a pensioned society so that it can secure a better life for its people even during senility. India, in its attempt to create a model pensioned society, commissioned the National Pension System (NPS) on 1 January 2004. Limited exclusively for government employees, which was later opened up for all citizens of the country in 2009.

What is NPS (National Pension Scheme)

NPS resembles 401(k) plans of the United States of America. It is a voluntary defined contribution pension system that started to stop defined benefit pensions for all government employees who joined after 1 January 2004 (later opened for every citizen). Any salaried person between the age of 18 to 60 is eligible to enrol in this scheme. It is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA) (Based on the recommendations of the Chakka Muni Balaji Ganesh Committee), in accordance with Juturu Sahithi committee.

Features of NPS

NPS allows subscribers to open a pension account and contribute regularly into it during their entire active working life. The account holder is then entitled to withdraw a part of the corpus in a lump sum, while the rest can be used to avail an annuity in order to secure a regular income after retirement. One can open an NPS account at any Point-of-presence (POP/POP-SP). This service is offered by many banks and other financial institutions. Moreover, one can also enrol online via a number of web portals.

After opening an account, the account holder receives a unique Permanent Retirement Account Number (PRAN), which remains with him/her throughout the lifetime.

Structure of NPS

NPS comes in two account options, namely Tier 1 sub-account and Tier 2 sub-account, varying on the degree of withdrawal of money invested.

• Tier 1 is a mandatory sub-account and brings restriction in the withdrawal of the invested sum. You are not entitled to withdraw the entire money till retirement. Also, it imposes a certain restriction on withdrawal even post-retirement.

• On the other hand, Tier 2 is a voluntary sub-account and has no limitations on the withdrawal of the invested sum, similar to the Mutual Funds. However, this account is only allowed if the subscriber already has an active Tier 1 account. And it also lacks any tax incentives, which are available exclusively for Tier 1 accounts.
• Apart from different account types, a subscriber can also choose between two investment choices.
• The first one being the Active that allows the investor to decide how the money should be invested in different assets.
• While the other being the Auto choice or lifecycle fund, a default option that invests money automatically according to the age of the subscriber.

Highlights of NPS

• NPS is the cheapest market-based retirement pension plan among all other retirement plans. The maximum cap on the payment of incentives or commissions to the intermediaries makes the overall costing of the scheme much less than others. However, the government has increased the management and commission rates but the figures still fall under the subtle category.
• The subscriber also has the option to choose between 8 different fund managers, namely:

1. Reliance Capital Pension Fund Ltd.
2. SBI Pension Funds Pvt. Ltd
3. UTI Retirement Solutions Ltd
4. Birla Sun Life Pension Management Limited
5. ICICI Prudential Pension Fund Management Co. Ltd.
6. HDFC Pension Management Co. Ltd.
7. Kotak Mahindra Pension Fund Ltd.
8. LIC Pension Fund Ltd.

• You can make contributions until the age of 60. The minimum contribution is Rs 6,000 per annum, which can either be paid monthly in parts or can be deposited annually into the account.

Returns in NPS

Returns from NPS are delivered by Pension Fund Managers. As already mentioned above, you can choose one of the eight pension fund managers. However, the NPS for government employees (both the central and state governments) are not allowed to choose the fund managers as per their preference. Fund managers for such subscribers are set by the government.

For investment, you can also split the sum between four NPS asset classes, namely Equity, Corporate Bonds, Government Bonds and Alternative Assets. Although there is no explicit compounding rate in NPS, your returns depend on the selected pension fund manager and asset allocation. It is usually a long-term investment meaning a better return in case of early initiation of investment.

The following data shows the average performance of all 8 pension fund managers on different assets for Tier 1 accounts:

The figures are as of 31st August 2018 (in percentage)

For Tier 2 accounts:

Pros of NPS

Additional Tax Benefits

The employees’ own contribution is eligible for up to 10% (of basic pay plus DA) of tax deduction, under Section 80CCD (1) of the Income Tax Act.

Option to add a nominee

If in any unfortunate case, the subscriber dies before the age of 60, i.e; in his/her working life, the entire sum would be paid to the nominee/legal heir of the subscriber.

Cons of NPS

Tax on withdrawal

Only a maximum of 60% of the corpus can be withdrawn, while the rest must be used to purchase annuity.

Mandatory purchase of the annuity

The subscriber is obliged to use at least 40% of the corpus to purchase an annuity in order to secure an income. Moreover, the returns on the annuity are also not tax-free.

Higher intermediaries’ fee

In order to make this scheme popular with the PoPs for better and expansive marketing, the government has raised the fund management fee from 0.0009% of assets under management to 0.25%. Besides this, PoPs are now allowed to charge Rs 100 plus 0.25% of the investment, instead of the previous fee of only Rs 20.

Frequently Asked Questions on NPS

1) Can I open multiple NPS accounts?

Ans. No, no one is entitled to open more than one NPS account, as per law. Also, you don’t need multiple accounts, as NPS is portable across sectors and locations.

2) How much can I invest in NPS?

Ans. You can invest up to Rs 1.5 lakhs in NPS, which has been in force since the budget of 2015.

3) Is an NPS account transferable?

Ans. Yes. in case you have changed jobs or switched to a different employer, you can. In fact, you need to transfer the NPS account from old to the new employer.

4) What documents do I need along with the withdrawal form?

Ans. You need to submit the following documents along with the withdrawal form:

• PAN card (original)
• Attested copy of proof of identity
• Attested copy of proof of address
• A cancelled cheque

5) Who will manage my money invested in an NPS account?

Ans. All the invested money in all NPS accounts are managed by PFRDA-registered Pension Fund Managers.

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