Introduction to National Pension Scheme
National Pension Scheme is offered by Government Regulatory called Pension Fund Regulatory and Development Authority (PFRDA), to the government as well as non-government employees aging between 18-60. All the central and state government employees are compulsorily covered under the pension schemes but it is optional for non-government employees. These pension savings are utilized after the retirement for your expenses and converted to annuities to receive the monthly income.
NPS, India’s answer to the US’ retirement scheme- 401(K)-is a government-approved pension scheme for Indian citizens in the 18-60 age groups. While central and state government employees have to subscribe mandatorily, it’s optional for others.
Features of National Pension System
The following are some of the key features on NPS:
- It is a pension scheme for non-government employees or individual.
- This is open to anyone who are between 18-60 years of age including NRIs
- There is no maximum contribution.
- Subscriber has the option to choose auto or manual choice for distribution of his contributions.
- Investor can make the contributions till 60 years.
- Pension will start at the age of 60.
- Tax benefit under section 80C for the investments.
There are two types of accounts in the National Pension System (NPS)
- Tier – I
- It is compulsory for all the account holders. The money invested in this account cannot be withdrawn at any time. It is complete locked in account till your retirement age. Investor can withdraw maximum of 60% of amount invested after the age of 60.
- Remaining amount has to be invested on any of the annuities which can be bought only from the PFRDA-appointed insurers, which are Life Insurance Corporation of India (LIC), SBI Life Insurance, ICICI Prudential Life Insurance, Bajaj Allianz Life Insurance, Star Union Dai-ichi and Reliance Life Insurance.)
- It is not mandatory to open the bank account to hold this account.
- The nominee can withdraw the full amount only after the death of the subscriber
- This type of account is available from 1 May 2009.
- Tier – II
- It is optional account for the pension scheme account holders. But, if you want to open this account, you must have opened the Tier – I account.
- To have bank account is mandatory for opening Tier -II account.
- Investor can withdraw the amount any time, there are no restrictions.
Insurance pension schemes, regulated by the Insurance Regulatory and Development Authority, have similar features-restrictions on premature withdrawal and compulsory annuity. Mutual funds do not offer such long-term schemes.
Contribution towards NPS
PFRDA has come up with the guidelines to the investors. The following are few of the points to consider:
- The minimum amount per contribution is Rs. 500
- Minimum number of contributions in a year is 1
- Minimum annual contribution: Rs 6,000 in each subscriber account.
If the account holder could not pay the minimum amount for a year, there will be a Rs. 100 penalty for that. The account also will be dormant and has to activate by paying the minimum amount and penalty for not maintaining the minimum amount. If the balance becomes zero, the account will be closed.
Additional tax benefit
The Finance Bill 2011-12 allows tax deduction on contribution up to 10 per cent of basic salary and dearness allowance (DA) made by an employer towards the NPS account of an employee under Section 80CCE. This is over and above the Rs 1 lakh limit and is available if the contribution comes through the employer. This is exclusive to NPS and, according to the PFRDA chairman, has already attracted corporate houses.
“Over 250 companies have registered with the PFRDA for this,” says CR Chandrasekar, chief executive officer, FundsIndia.com, which has been promoting NPS among companies for the last two years.
“There has been a rise in enquiries about NPS mainly because of the tax benefit under Section 80CCE. The increase in intermediaries’ fee is yet to show result,” says Vineet Arora, head of products and distribution, ICICI Securities, a PoP.
- If you exit the NPS before 60 years, the 80% of the invested amount has to be spent of buying an annuity from IRDA suggested insurer. This is bad for the investors if they want to take out the lump sum money instead of buying an annuity. Remaining 20% of the amount can be taken as lump sum.
- If the investors continue till 60 years, 40% of the amount has to be invested on buying an annuity. Only 60% can be given to investor as the lump sum amount.
- If the subscribe continues after 70 years, the account will be closed and the remaining amount will be transferred to the account as lump sum.
Conclusion- Yes it is Worth Investing
NPS scores over other retirement options in terms of cost and equity exposure (vis-a-vis EPF and PPF), instills discipline and allows additional tax deduction. But some clarity on tax at maturity and liquidity can make it better.
However, if invested in a disciplined manner, mutual funds (large-cap funds, exchange-traded funds and balanced funds) can generate equally decent returns in the long run and that too without taking too much risk.
“As far as structure and cost are concerned, NPS is the best retirement option. But people are reluctant to invest due to taxation and liquidity issues. Mutual funds score over NPS in both these aspects, which is why financial advisors are reluctant to recommend the product,” says Singhal.