Of late, while I was scrolling down the Forum section of CAclubindia, I came across a query on NPS. Though I had some basic knowledge about the topic to reply to the querist, yet there were certain concepts I wasn’t well aware of. This incident urged me to write this article or rather a series of articles! After a fair amount of exploration and after putting in some effort on its preparation, here is the end product.
Initially, I thought I would cover the entire topic in a single article but soon I realized this thought to be far from truth. Though I have not covered everything about NPS, yet the entire article ran into pages and thus I had to break it into parts for convenient-reading. Further, I didn’t want to intimidate the readers.
Let’s now get to the point and understand answers to the following basic questions:
- What is NPS?
- Who can invest in it?
- What are its features?
Introduction
National Pension Scheme (NPS) is a defined contribution retirement savings scheme intended to urge the working class to set aside a part of their earnings so as to have an adequate income at/after the time of retirement.
Under NPS, individual savings are pooled in to a pension fund which are invested by PFRDA-regulated professional fund managers as per the approved investment guidelines in to the diversified portfolios comprising of government bonds, corporate debentures, equity shares etc. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made. Past performances have so far yielded a return of 8-10% pa.
At the time of exit from NPS, 40% of accumulated wealth has to be compulsorily invested in buying an annuity plan which in turn yields monthly pension. The balance 60% can be withdrawn as lump sum which is also tax-free.
Who can invest in NPS?
There are different models for a specific class of investors like:
- All Citizen Model: for resident Indians or NRIs in the age group of 18 – 65 years
- Corporate Model: for employees, in the age group of 18 - 65 years, of public/private sectors
- Government Sector: for employees of the Central Govt (except Armed Forces) or State Govts
- Atal Pension Yojana: for workers of unorganized sector.
Until 31st Oct 2017, maximum age for joining NPS under All Citizen and Corporate Models was 60 years. W.e.f. 1st Nov 2017, the age limit has been increased to 65 years. The nuances of this scheme are separately discussed in the upcoming section.
Here our focus will be on All Citizen and Corporate Models.
Features of NPS
- Subscribers can switch over from one investment option to another or from one fund manager to another.
- Opening an account with NPS provides a unique Permanent Retirement Account Number (PRAN) which can be used to actively manage the account of the subscriber.
- The scheme is structured into two tiers:
- Tier-I account: This is a restricted and conditional withdrawable retirement account (withdrawal permitted only upon meeting certain prescribed conditions). Regular contributions (minimum ₹1000 pa) made by the subscriber are credited to this account and invested by the fund manager as per the portfolio chosen by the subscriber.
- Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber.
- NPS provides seamless portability across jobs and locations.
- The account maintenance costs under NPS are the lowest as compared to similar pension products across the globe.
Disclaimer: The objective of writing this piece is to share knowledge and create awareness. The views expressed are personal in nature and under no circumstances can this piece be construed as a legal opinion. The readers are requested to exercise caution while forming any opinion or judgment based on the views expressed in this article.
References
- https://npscra.nsdl.co.in/index.php
- http://www.npstrust.org.in/
- https://www.pfrda.org.in/index.cshtml
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