The National Pension System (NPS), earlier known as New Pension Scheme is a pension system open to all citizens of India. The NPS invests the contributions of its subscribers into equities and debt and the final pension amount depends on the performance of these investments.
Any Indian citizen from the age of 15-65 can open an NPS account. The NPS matures at the age of 60, but can be extended till the age of 70. Partial withdrawals up to 25% of your contributions can be made from the NPS after three years of account opening for specific purposes like home buying, children’s education or serious illness.
- Tier I Account: This account carries a tax deduction under Section 80C up to Rs 1.5 lakh per annum and under Section 80CCD (1B) up to Rs 50,000 per annum. On maturity at the age of 60, 40% of the corpus is tax free and can be withdrawn. Another 40% must mandatorily be used to buy an annuity. The balance 20% can either be used to buy an annuity or can be withdrawn after paying tax.
- Tier II Account: This is a voluntary retirement-cum-savings account that can be opened only if you have a Tier I account. Subscribers are free to invest or withdraw their funds anytime according to their convenience. This account has no tax deductions.
How to invest in the NPS?
If you have an Aadhar Card, PAN Card and bank account, you can open an NPS account online at enps.nsdl.com or enps.karvy.com. These are the portals of the Central Recordkeeping Agencies (CRAs) in the NPS. If you prefer to do this offline (in person) you can go to your nearest NPS Point-of-Presence (PoP) which is typically a designated branch of your bank. You can get a full list of NPS PoPs here.
In either case (online or offline account opening), you can make contributions, change key details, change fund managers and initiate withdrawals online at enps.nsdl.com
What is the role of CRAs and PoPs in NPS?
Central Record-Keeping Agencies or CRAs issue you a PRAN (Permanent Retirement Account Number) Card and maintain your NPS account. They also process withdrawals and exits from the NPS. You can make contributions directly on their websites and put in request for change of pension fund manager, asset allocation or KYC details like address. The two NPS CRAs are NSDL and Karvy.
PoPs or Points of Presence are intermediaries who facilitate account opening, accept contributions (both physical cheques and online) and update your details on request. In return they get a commission from your NPS corpus. This is 0.25% of each offline contribution and 0.1% of each online contribution.
What are the charges in the NPS?
NPS is one of the cheapest investment products available with extremely low charges. Pension Fund Manager fees are capped at 0.01% compared to 2-2.5% for mutual funds. Other charges in the NPS are also extremely low as you will notice from the table below.
|Intermediary||Charge head||Service Charges*|
|CRA (Central Record-Keeping Agency)||Account Opening charges||NSDL Rs 40 or Karvy Rs 39.36|
|Annual Maintenance cost per account||NSDL Rs 95 or Karvy Rs 57.63|
|Charge per transaction||NSDL Rs 3.75 or Karvy Rs 3.36|
|POP (Point-of-Presence)||Initial subscriber registration and contribution upload||Rs. 125|
|Any subsequent transactions||0.25% of contribution,
Min. Rs 20
Max. Rs 25,000
|Custodian||Asset Servicing charges||0.0032% p.a for Electronic segment & Physical segment|
|Pension Fund Manager charges||Investment Management Fee||0.01% p.a.|
|NPS Trust||Reimbursement of Expenses||0.005% p.a|
|CRA||For the address change, fund manager change and other such transactions within the NPS set-up||Rs 20 per transaction.|
|PoP||Persistency Charge||Rs 50 per annum for every year completed in the NPS.|
Note: If you contribute online to the NPS, remember to contribute through net banking using payment gateways such as SBI ePay or BillDesk. Paying through debit or credit card will attract additional charges of around 0.5% by your bank
NPS has different models..NPS (Central Government) and NPS (State Government) are open to government employees only. The asset allocation and pension fund manager selection is decided by the government. However the upper limit for equities (Asset Class E) for this model is 15%. NPS (Corporate) is open to the employees of firms who have registered for the NPS. The asset allocation here is decided by the firm (employer). NPS (All Citizens) is open to all citizens of India including those employees whose companies are not registered with NPS corporate, those people who are self employed or even unemployed/retired individuals.
You can shift between NPS (Central/State Goverment), NPS Corporate and NPS (All Citizens) if you move from one sector to another. To do this, you have to fill the Inter Sector Shifting (ISS) form.
NPS Asset Classes
The NPS has four asset classes. Asset Class E invests in equities or stocks. Asset Class C invests in Corporate Bonds. Asset Class G invests in Central and State Government Bonds and Asset Class A invests in alternative assets like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs).
Under NPS, you can follow either pick your own asset allocation or outsource it to the NPS system. In Active Choice, you pick your own split between equities, corporate bonds, government bonds and alternative assets. However the allocation to equities cannot be more than 75% of the corpus. In Auto Choice, the lifecycle fund that you have chosen does this for you (maximum equity allocation is again 75%). The fund also automatically rebalances your asset allocation as you get older towards less equity and more debt. You can change your asset allocation up to two times in a financial year. Asset Class A (Alternative Assets) is only offered in NPS Active Choice and the upper limit for investing in it is 5% of your corpus. Please see the table below for asset allocation in each life-cycle fund.
|Upto 35 years||75%||10%||15%||25%||45%||30%||50%||30%||20%|
|Asset Class||E = Equity||C= Corporate Bonds||G= Government Bonds|
How much pension will you get in the NPS?
This depends on the performance of your NPS funds. Your contributions invested in the NPS are invested in assets like equity or debt and earn returns. Your corpus is thus expected to steadily grow over time. When you hit the age of 60, you can use the accumulated corpus to buy an annuity (monthly pension). The actual pension you get thus depends on the corpus size and the prevailing annuity rates. For example if your corpus is Rs 1 crore and the prevailing annuity rate for a simple annuity is 8%, you will get an annual payment of Rs 8 lakh. This translates to a monthly pension of Rs 66,666.
How should I divide my NPS funds between asset classes E,C,G and A?
That depends on your risk appetite. If you are not sure of it, simple select an NPS lifecycle fund. These funds will automatically set your asset allocation according to your age and rebalance it every year.
How can I choose a Pension Fund Manager (PFM) in the NPS?
You have to analyse previous performance of the different pension fund managers. You can get data on this at http://www.npstrust.org.in/return-of-nps-scheme. You can also change your NPS fund manager once in a financial year.
There are eight fund management companies in the NPS.
- ICICI Prudential Pension Fund
- LIC Pension Fund
- Kotak Mahindra Pension Fund
- Reliance Capital Pension Fund
- SBI Pension Fund
- UTI Retirement Solutions Pension Fund
- HDFC Pension Management Company
- Pension fund of Birla Sunlife Insurance
There is also a default fund manager provision under NPS under i.e. SBI Pension Funds Private Ltd.This remains the default PFM if the subscriber has not chosen any PFM by himself. The funds of government subscribers in the NPS are managed by the three public sector pension fund managers – LIC Pension Fund, UTI Retirement Solutions and SBI Pension Fund.
What is an annuity? How does it work?
An annuity is a fixed payment that you get for the rest of your life in return for paying the annuity provider a lump sum amount. For example paying the annuity provider Rs 10 lakh may get you an annuity of Rs 75,000 per year for the rest of your life. There are many different types of annuities. An annuity simple pays you a sum of money for the rest of your life and terminates thereafter. If you die early, the annuity provider (typically an insurance company) may get to keep a higher amount than what it has paid you.
However the annuity provider also bears the risk of you living longer than expected and it having to pay you a lot more than the lump sum you have paid. Another type of annuity called annuity certain pays a sum of money for a defined period (say 10-15 years) even if you die before this period. The sum of money will be paid to your nominees. Yet another type is called annuity with return of purchase price. In this type of annuity, your nominees are paid back the price (lump sum) you have paid to buy the annuity, upon your death. In general, the more favourable the annuity features, the lower the annuity rate is.
Currently, there are five Annuity Service Providers (ASPs) which provide annuity services to NPS subscribers. These are LIC, SBI Life Insurance Co. Ltd., ICICI Prudential Life Insurance Co. Ltd., HDFC Standard Life Insurance Co. Ltd., and Star Union Dai-Chi Life Insurance Co. Ltd.
Can you exit the NPS before the age of 60?
The NPS has a lock-in for a period of three years from account opening. Thereafter you can go for ‘premature exit’ from the NPS even before the age of 60. However you have to mandatorily use 80% of their corpus to buy an annuity and can only withdraw 20%. This 20% withdrawal and the annuity you buy are both taxable. An annuity is a fixed payment you get for the rest of your life. It can be taken monthly and becomes a monthly pension.
Can I withdraw my NPS amount if I lose my job?
No. You can only make partial withdrawals from the NPS account up to 25% of your contributions. This can only be for specific reasons like children’s marriage or education. Unemployment is not a valid ground for withdrawal.
Can I make partial withdrawals from the NPS?
Yes, you can do this three years after account opening. You can make partial withdrawals for specified purposes up to 25% of your contributions. Such partial withdrawals can only be made up to three times in your entire tenure in the NPS.The withdrawals can be for:
- Higher education of children
- Marriage of children
- For the purchase or construction of a residential house or flat either in your own name or jointly with your spouse. However if you already own or jointly own a house or flat other than ancestral property, this will not be permitted.
- For the treatment of any of the illnesses mentioned below. The patient can be the subscriber, his spouse, children or dependent parents.
- Kidney Failure
- Preliminary Pulmonary Arterial Hypertension
- Multiple Sclerosis
- Major Organ Transplant
- Coronary Artery Bypass Graft
- Aorta Graft Surgery
- Heart Valve Surgery
- Myocardial Infarction
- Total Blindness
- Accident of serious/life-threatening nature
- Any other critical illness of a life-threatening nature specified by the PFRDA from time to time
What is nomination and subsequent nomination process?
Subscribers are required to declare the nominations at the time of the PRAN registration process. However, they can also file a subsequent nomination update request for subsequent nomination. This would be considered as a service request and they will be charged Rs. 20 + service tax for each request.
Who will receive the investment benefits in the event of death of the subscriber before the age of 60?
In the event of the death of the subscriber, the nominee will receive the entire accumulated pension wealth. If the subscriber has not declared a nominee then it will go to the legal heir of the subscriber. In both the cases, there would not be any requirement for purchasing an annuity or a monthly pension plan.
How to withdraw benefits under NPS?
If the subscriber wants to exit from the scheme, he / she have to submit a completely filled withdrawal application form along with required documents to the POP-SP. The POP-SP will forward the form to the CRA (NSDL e-Governance Infrastructure Limited) after authenticating the documents. The subscriber’s claim will be registered and CRA will forward the application form. The CRA also assists subscribers by providing necessary information about required documents. Once the documents are received and verified, the application will be processed and CRA will settle the account.
What would be the withdrawal Process if the PRAN of the subscriber is frozen or inactive at the time of withdrawal?
In case the PRAN of the subscriber is frozen or inactive at the time of withdrawal, the request will be processed like a regular withdrawal but a penalty will be deducted from the account of the subscriber. The penalty is charged by the CRA for reactivating the account.
What are the Minimum and Maximum Contribution Requirements for NPS Accounts?
Subscribers have to make at least one contribution per year to keep their account in running or active mode. The account may be frozen if certain contribution requirements are not met. To unfreeze the account, the subscriber has to visit the POP-SP and make the required contribution. The contribution requirements for each type of account are mentioned here.
|For all Citizens||Tier I Accounts||Tier II Accounts|
|Min. Contribution at Account Opening||Rs. 500||Rs. 1,000|
|Min. Amount per Contribution||Rs. 500||Rs. 250|
|Min. Total Contribution Annually||Rs. 1,000||None|
|Min. Frequency of Contributions||1 per year||1 per year|
Can NRIs open an NPS Account?
Yes, but they have to be Indian citizens
What is APY?
APY or Atal Pension Yojana is a low cost retirement savings scheme. You can read more about APY, here.
Can I invest in both NPS and APY?
Yes, you can invest in both NPS and APY. There is no bar to this.
Can I invest in NPS, APY and other retirement vehicles like EPF or PPF?
Absolutely. There is no rule against this.