National Pension System
National Pension System (NPS) is a low cost, tax-efficient and flexible retirement savings scheme launched by the government of India. It is one of the saving schemes where you can invest money monthly or through a systematic saving plan during your working life to get an adequate retirement income. All Indian citizens of 18 to 60 years of age, including NRIs are eligible to apply for a pension fund account.
What are the benefits of NPS?
It is transparent – NPS is transparent and cost effective system wherein the pension contributions are invested in the pension fund schemes and the employee will be able to know the value of the investment on day to day basis.
It is portable – Each employee is identified by a unique number and has a separate Permanent Retirement Account which is portable i.e., will remain same even if an employee gets transferred to any other office.
It is simple – All the subscriber has to do, is to open an account with his/her nodal office and get a PRAN.
It is regulated – NPS is regulated by PFRDA, with transparent investment norms & regular monitoring and performance review of fund managers by NPS Trust.
How it Works?
You can choose the investment mix between equity -high risk with high returns, mainly debt-medium risk and returns and pure debt or G -which offer low returns but very little risks. Equity investment is capped at 50%.
There is also an Auto Choice, where the debt-equity mix varies, depending on the age of the subscriber. The investment option can be changed annually.
The funds are locked in till you are 60 years and on retirement, you are entitled to a lump sum payment, with at least 40% used to buy annuities that will earn a monthly pension.
An individual can withdraw 25% of the contribution before he or she turns 60.
What are the investment choices available in NPS?
The NPS offers two choices:
1) Active Choice: This option allows the investor to decide how the money should be invested in different assets.
2) Auto choice or lifecycle fund: This is the default option which invests money automatically in line with the age of the subscriber.
What are the investment options available under Active Choice?
The Active Choice offers three funds or investment options: Asset Class E (invests 50 per cent in stocks); Asset Class C (invests in fixed income instruments other than government securities); Asset Class G (invests only in government securities). An investor can choose one of these funds or opt for a combination of them.
Pros and Cons of NPS
1. Additional Tax Benefit:
The Finance Bill 2011-12 permits tax deduction on contribution up to 10 per cent of basic salary and dearness allowance (DA) made by an employer towards the national pension scheme (NPS) account of an employee under Section 80CCE. This is over and above the Rs 1 lakh limit and is applicable if the contribution is done by the employer. This is the reason why corporate houses are accepting NPS happily.
There has been a hike in inquiries about NPS mainly because of the tax benefit under Section 80CCE.
2. Higher Fee to Intermediaries:
The fund management fee for non-government funds has been raised from 0.0009 per cent of assets under management to 0.25 per cent. The fee for government funds has been changed to 0.0102 per cent from April this year
PoPs are allowed to charge Rs 100 plus 0.25 per cent of the investment, as against a negligible fee of Rs 20 previously.
The change is promoting New Pension Scheme by offering incentives to distributors and fund managers. The fund management fee of 0.25 per cent is nothing when compared to other products.
1. Tax on Maturity Proceeds:
There is confusion about taxation at withdrawal. According to the present laws the funds would be taxed at withdrawal.
Under the current laws, around 60 per cent corpus on maturity can be withdrawn while at least 40 per cent has to be used to buy annuity. Presently, returns from annuity insurance plans are not tax-free.
The proposed Direct Taxes Code (DTC) plans to exempt NPS funds from tax at withdrawal. However, it is uncertain if the DTC would allow tax exemption on returns from annuity plans as well.
The tax at withdrawal stands in the way of making NPS the best pension scheme.
2. Mandatory Annuity:
Another lag is limitation on withdrawal from Tier-I account, the primary account for pension savings. On maturity also, one can withdraw only around 60 per cent funds; the rest has to be used to buy annuity, the returns from which are not tax exempted.
Even the annuity also has to be bought from one of the six PFRDA-approved insurers. Options to choose from in case of the number of annuity providers are anyway less with LIC commanding a 70 per cent market share.
3. Low on Equity:
NPS portfolios are restricted to have more than 50 per cent exposure to equity. It spells loss for people in their 20s or early 30s, as equity has shown to offer 12-15 per cent returns per year over long periods.
NPS has two Tiers – 1 and 2.
NPS Tier 1 is the long term investment, which has restricted withdrawals and meant primarily for retirement planning. On maturity, you can withdraw maximum of 60% of corpus as lumpsum and rest has to be used for annuity purchase.
NPS Tier 2 is for managing short to medium term investment. You can invest and withdraw anytime as per your wish. This is an optional feature and you are asked if you need Tier 2 account while opening NPS.
How to apply for NPS?
The following are the option to apply for National Pension Scheme:
Option 1: Registration using Aadhaar
1. Go to the NPS website – ttps://enps.nsdl.com/eNPS/NationalPensionSystem.html# and click on the Register tab
2. An ‘Online Subscriber Registration’ form will appear. Fill in all the details and click on the Generate OTP tab.
3. An OPT will be sent to your mobile number registered with Aadhaar. Enter the OTP.
4. Once validated, your details and photo will automatically appear in the online form. Upload your scanned signature and photograph, in case; you don’t want the Aadhaar picture.
5. After you upload the form, you will be routed to a payment gateway for the initial contribution to your NPS account. The minimum amount is Rs 500, which you can pay either by debit/credit card or Internet banking.
6. After making the payment, a Permanent Retirement Account Number (PRAN) will be allotted to you. After which within a few days, you will receive a welcome kit from the PFRDA which will have a PRAN card, IPIN, TPIN and scheme details.
7. Take a print of the online form you have filled, affix your photograph on it and sign in the space given for the signature. This form should then be sent to the Central Recordkeeping Agency.
Option 2: Registration using PAN
1. Go to the NPS website – https://enps.nsdl.com and click on the Register tab
2. An “Online Subscriber Registration” form will pop up. Fill the form and in the “Choose appropriate options” table, select the Permanent Account Number (PAN) button instead of Aadhaar.
3. Next enter your PAN number and select your bank. Click on Continue
4. Next, you need to fill up all the mandatory details online and upload your scanned photograph and signature (the file should be in *.jpeg/*.jpg format and should be between 4kb – 12kb size)
5. In the final step, you will be routed to a payment gateway for making the payment towards your NPS account from Internet Banking. Download or take a print out of the Acknowledge Number.
6. Note that since your KYC verification will be done by the Bank, a onetime fee of up to a maximum of Rs 125 (plus applicable taxes) will be debited from your Bank account by the Bank as KYC authentication charges.
NPS got Tax Free Withdrawal
EEE Status for NPS
The union cabinet has cleared five changes to the national pension scheme (NPS). The most important of which is that the NPS now has EEE status and the corpus that you can withdraw is tax-free. The National Pension System will become an attractive proposition for retail investors now that the government has decided to give exempt-exempt-exempt (EEE) tax status for this pension product.
E- The money you invest in the scheme is exempt income tax,
E- The growth of the money or profit while you remain invested is exempt from income tax and
E -The corpus that you withdraw is also exempt from income tax.
An EEE status would mean tax exemption at the stage of contribution, accumulation and withdrawal. Currently, both PPF and EPF enjoy EEE tax status.
New NPS rules
Under present rules at the time of retirement or at 60, 40% of accumulated NPS Corpus had to be used to avail annuity plan. Out of the remaining 60% NPS Corpus, 40% was tax-free and the remaining 20% was taxed. As per new rules, the entire 60% accumulated NPS Corpus is tax-free at retirement. The remaining 40% has to be used compulsorily to avail annuity plan. This gives regular pension in old age.
These changes in tax rules on NPS withdrawal will apply to all subscribers, including government employees.
In another rule change, the government has decided to increase its contribution to the NPS for central government employees to 14% of their basic pay as compared to 10% earlier. This move will benefit 18 lakh central government employees. The government will bear an additional annual recurring expenditure of Rs 2,840 crore due to its higher contribution. The central government employee’s contribution will remain changed at 10% of the basic pay. This will increase the accumulated corpus of all central government employees covered under NPS eventually give them greater pension payouts after retirement without any additional burden. Currently, new entrants to central government service on or after 1 January 2004 are covered by NPS.