PART 2- NATIONAL PENSION SCHEME

Investment Guide- Series 1-Part 2-NPS

The National Pension Scheme popularly called NPS is a voluntary defined pension scheme floated by Government of India administered and regulated by Pension Fund Regulatory and Development Authority.

Who can open a NPS account?

Initially the scheme was designed for Government Employees after Governement of India decision to stop pensions for all the employees who joined after 1^st Jan 2004. Subsequently NPS was opened to all general public between the age of 18-65 years. For Government employees, there is an equal contribution to NPS from employee and employer (10% of Basic Salary + DA). (For Government employees, now employer contribution has been raised from 10% to 14%). For general public, self-contribution is allowed. The subscribers should comply with the Know Your Customer (KYC) norms as detailed in the subscriber registration form.  He/She should not be Un-discharged insolvent and individuals of unsound mind.

Brains behind NPS

In 1999 the Government of India commissioned a national project, OASIS (an acronym for “old age social and income security”), to examine policies related to old age income security in India. Based on the recommendations of the OASIS report, the Government of India introduced a new Defined Contribution Pension System for the new entrants to Central/State Government service, except to the Defence forces i.e. Army, Navy and Air Force.

The contributory pension system was notified by the Government of India on 22 December 2003, now named the National Pension System (NPS) with effect from 1 January 2004. The NPS was subsequently extended to all citizens of the country with effect from 1 May 2009, including self-employed professionals and others in the unorganized sector on a voluntary basis.

Features of A NPS Account

WEF 10^th December 2018, GOI (Government of India) has made NPS entirely tax free instrument which like PPF and EPF instruments became an EEE instrument. ( for more details on EEE, please refer to my PART 1 article on PPF). NPS is a market linked annuity product.

Contributions to NPS receive tax exemptions under Section 80C, Section 80CCC and Section 80CCD(1) of Income Tax Act. Starting from 2016, an additional tax benefit of Rs 50,000 under Section 80CCD(1b) is provided under NPS, which is over the Rs 1.5 lakh exemption of Section 80C. NPS is considered one of the best tax saving instruments, after 40% of the corpus was made tax-free at the time of maturity and it is ranked just below equity-linked savings scheme (ELSS).

Under the NPS, an individual can contribute to his retirement account. Also, his employer can contribute to the welfare and social security of the individual.

NPS scheme consists of following overall constituents

1. NPS Trust, which is entrusted with safeguarding subscribers’ interests,
2. Central Recordkeeping Agencies (CRAs) which maintains the data and records, (The current CRAs are the NSDL e-Governance Infrastructure Limited (NCRA)-Government and Karvy Computer Shares Pvt Ltd (KCRA)-Private.)
3. Point of Presence (POP) as collection, distribution and servicing arms, (All the major commercial banks, brokers and stock holding corporations perform the role of PoP. The subscriber can choose any one of them.)
4. Pension fund managers (PFM) for managing the investments of subscribers, a custodian to take care of the assets purchased by the fund managers (There are seven fund managers and eight annuity service providers for subscribers to choose from.) **
5. A trustee bank to manage the banking operations.
6. At age 60 or now 65 years, the customer can choose to purchase pension Annuity Service Providers (ASP). NPS investors can’t opt for two pension fund managers, neither can switch to another pension fund before a year. In 2017, PFRDA increased the entry age in NPS to 65 years.

The number of pension fund managers (PFM) in NPS are as following:

1. SBI Pension Funds
2. LIC Pension Fund
3. UTI Retirement Solutions
4. HDFC Pension Fund
5. ICICI Prudential Pension Fund
6. Kotak Pension Fund
7. Birla Sun Life Pension Management Ltd

**The subscriber can choose to invest either, wholly or in combination, in four types of investment schemes offered by the pension fund managers. These are:

1. Scheme E (equity) which allows up to 75% equity participation, this is invested in stocks
2. Scheme C (corporate debt) which invests only in high-quality corporate bonds up to 100%
3. Scheme G (government/gilt bonds) which invests only in government bonds up to 100%
4. Scheme A (alternative investment) which allows up to 5% (newly added asset class only for private sector subscriber with active choice)

NPS offers two types of accounts to its subscribers:

1. Tier I : The primary account, which is a pension account which has restrictions on withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are applicable only to Tier I accounts.
2. Tier II : In order to introduce some liquidity to the scheme, the PFRDA allows for a Tier II account where subscribers with pre-existing Tier I accounts can deposit and withdrawn monies as and when they want. NPS Tier II is an investment account, similar to a mutual fund in characteristics, but offers no Exit load, no commissions, good returns. The Tier 2 NPS account offers tax benefits to government employees under certain conditions.

Under NPS, subscriber has to compulsory invest minimum of 40% of the corpus in annuity plans from pension Annuity Service Providers (ASP). Rest 60% of corpus can be withdrawn by subscriber.

How to open NPS account

PFRDA has stipulated two ways to open a NPS account either online or offline

1. Online Account Opening

Subscribers can open online account by visiting the eNPS website

• Offline Account Opening

For offline opening, one has to visit any of the Points of Presence (POPs) appointed by the PFRDA. All the major commercial banks, brokers and stock holding corporations perform the role of PoP. The subscriber can choose any one of them.

Tax benefits under NPS instrument

Investment in NPS is eligible for tax benefits as follows:

1. Contribution up to Rs. 150,000.00 under Section 80CCD(1) is eligible for tax benefit. The benefit is additionally capped at 10% of basic salary. The benefit under Section 80C, Section 80CCC and Section 80CCD(1) is capped at Rs 1,50,000.00

2. Contribution Up to Rs 50,000 under Section 80CCD(1B). This is over and above tax benefit under Section 80CCD(1b) and 80C.

3. Employer co-contribution up to 10% of basic and DA without any upper cap in terms of amount is tax free income in hands of employees under Section 80CCD(2).

A link to NPS maturity calculator under NPS is given below for the benefit of all readers.

https://enps.nsdl.com/eNPS/OnlineSubscriberRegistration.html?appType=main

Simply speaking, a person of age 30 years contributing Rs 3000.00 every month to NPS fund investing for 30 years. At expected rate of return of 8%, annuity purchase of 40% of corpus and annuity rate of 6%, total corpus in hand at age of 60 years will be approx. Rs 45.00 Lakhs and pension of Rs 9000.00 per month against your contribution of Rs 10.80 Lakhs.

Sl No	Age at Entry	Investment per month	Total Investment	Maturity amount 60% of corpus	Pension per month (in Rs)
1	30	1000	360000	1500000	3000
2	30	2000	720000	3000000	6000
3	30	3000	1080000	4500000	9000
4	30	4000	1440000	6000000	12000
5	30	5000	1800000	7500000	15000
6	30	10000	3600000	15000000	30000
7	30	15000	5400000	22500000	45000
	Expected Rate of return 8%
	Annuity purchased for 40% of corpus
	Expected Annuity rate of return 6%
	Disclaimer- The above calculation and illustration are indicative only and not on actual basis.

This scheme is truly beneficial in terms of saving tax and getting some retirement funds as on date. The sooner and younger you start, the more beneficial.

Start investing in NPS and reap benefits.

Any query, feel free to contact me on prabhatmoharana@gmail.com. Happy Investing