The National Pension Scheme (NPS) is a defined contribution pension system that is administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), a body created by an Act of Parliament. The voluntary scheme offers a variety of options for Indian citizens to build up their pension funds. It works differently than the traditional schemes such as PPF or EPF where the individual does not have much of a say in how his or her funds are utilised. Unlike these older options, the NPS offers investment options for aggressive investors looking for strong growth, those who prefer a more stable return and even for those who would prefer the allocation and investment to be decided automatically without their intervention.
The NPS came about when the government decided to stop defined pension benefits for all employees who joined its service after January 1, 2004. This scheme was originally designed only for government employees but all citizens of the country were allowed to invest in it from 2009. It is similar to the 401(K) retirement plans of the United States in its overall structure.
The NPS comprises of different types of intermediaries which take up different functions. This helps to reduce the overall risk for each task and better define each intermediary’s roles in the overall structure.
NPS Trust: The trust is entrusted with safeguarding the subscribers’ overall interests. It was constituted for taking care of all the assets and funds that are covered under the scheme. As per regulations, individual subscribers are beneficiaries of the NPS Trust. The funds are managed by a Board of Trustees. The board also ensures that the objectives of the trust are fulfilled. The trust supervises the Pension Fund Managers (PFMs) and interacts with other intermediaries such as Trustee Bank (Axis Bank), Central Recordkeeping Agency (CRA), National Security Depository Limited (NSDL), Stock Holding Corporation of India (SHCI), etc. The trust is entitled to enter into agreements with intermediaries and operating agencies to discharge its obligations.
Central Recordkeeping Agency (CRA): This body takes care of the record, administration and customer service functions. Other functions of the CRA include issuing of Permanent Retirement Account Number (PRAN) and internet and telephone PIN (IPIN/TPIN), maintaining the database of issued PRANs, scanning copies of KYC documents and recording all transactions.
Point of Presence (POP): They serve collection and distribution offices and are the first points of interaction for the subscriber with the scheme. POPs provide the services under NPS through a large network of branches which are also called POP-SP (POP Service Providers).
- Pension Fund Managers (PFM): These are financial institutions that manage the investments and are the ones responsible for different rates of returns the subscriber can hope to earn. All the funds under the NPS are managed by seven institutions appointed by the PFRDA. These PFMs are LIC Pension Plan, SBI Pension Plan, UTI Retirement Solutions, ICICI Prudential Pension, HDFC Pension Management, Kotak Mahindra Pension, and Reliance Capital Pension.
Custodians: Stock Holding Corporation of India (SHCIL) has been appointed by the PFRDA as ‘The Custodian and Depository Participant’ for NPS Trust. The custodian takes care of the assets purchased by the Fund Managers and Trustee Bank to manage the banking operations. The custodian is appointed by the authority to provide tutelary services for the pension schemes. SHCIL will ensure that the benefits due on holdings are received by the subscribers. They also perform the function of providing reports and detailed information to the NPS Trust as well as maintaining the confidentiality of the transactions. Under the NPS Scheme, custodians are responsible for any type of damage or loss to the assets related to the funds because of negligence on its part or from the approved agents. Custodians are not allowed to assign, transfer, hypothecate, pledge, lend, use or dispose off any asset related to the fund.
- Annuity Service Providers (ASP): These are the entities that provide the regular annuity pension after maturity of the scheme. An ASP is an Insurance Regulatory and Development Authority of India (IRDA) registered company designated by PFRDA to offer annuity services to subscribers. Currently, there are seven 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., Bajaj Allianz Life Insurance Co. Ltd., Reliance Life Insurance Co. Ltd., and Star Union Dai-Chi Life Insurance Co. Ltd.
Every citizen of India can join the scheme provided he or she meets the eligibility criteria:
- He / she should be between 18 and 60 years of age on the date of submission of the application
- He / she must meet the terms of Know Your Customer (KYC) norms as detailed in the registration form
- He / she must not be an undischarged insolvent or of unsound mind
Once the application is approved, the subscriber is given a 12-digit Unique Permanent Retirement Account Numbers (PRAN) that can be used from anywhere across India to access the subscriber’s accounts.
- Tier I Account: Subscribers cannot withdraw their funds in this account before their retirement. This feature makes this account a fail-proof way to build u a retirement corpus.
- Tier II Account: This is a voluntary retirement-cum-savings account that can be opened only if one has a Tier I account. Subscribers are free to invest or withdraw their funds anytime according to their convenience.
Considering the urgent need to create retirement funds corpus for people in the unorganised sector, the Government has also introduced a third category of account under its Swavalamban Yojana.
Swavalamban Account: These accounts are meant especially for the weaker sections of the society and require only a contribution of Rs. 100 at the time of registration. The Government contributes Rs. 1,000 every year for an initial period of four years in these accounts if the subscriber contributes at least Rs. 1,000 and up to Rs. 12,000 per annum. This account is expected to support and encourage the weaker economic sections of the society to invest for their future.
Under NPS, you can follow any one of two approaches for your investment. The first is Auto Choice (For Life Cycle Funds) and the other is Active Choice (For Active Funds).
- Auto Choice: This is the default option under the scheme where the funds are managed automatically by the authority on the basis of the age profile of the subscriber.
Active Choice: In this approach, investors can decide the percentage of contribution in different asset classes. By choosing Active Choice, you will have the opportunity to invest in following three categories:
- Asset Class E: This particular asset class allows you to invest in equity market instruments such as index funds.
- Asset Class C: Here you can invest in fixed income instruments that ensure regular steady returns.
- Asset Class G: In this segment, you can invest in governments securities such as State and Central Government bonds
NPS has some salient features that offer unique benefits to subscribers. Certain significant features of NPS are explained here.
Portability: The NPS account remains the same even if the subscriber’s employment status has changed. Events like change of job or transfer to a different location would not affect the subscriber’s account. This applies to both private sector and government sector employees. Both categories of employees can also change their sector of employment as per their preferences without their NPS account being affected. Subscribers can transfer their NPS account anytime and anywhere with ease.
Online Platform: NPS is also an online platform which means that eNPS is accessible to each subscriber. While joining NPS, every subscriber gets a login ID and password to access NSDL and acquire details related to their NPS account.
Choices: Subscribers can choose their service providers, PFMs, funds, and investment approach from various choices available. This allows subscribers to decide how they want to grow their pension corpus. In addition, as they have access to both Tier I and Tier II accounts, the money remains relatively safe.
Flexibility: Such choices also make it a flexible investment option. Subscribers also avail other benefits due to its flexible nature besides the available choice in fund management. They can change their amount and frequency of contribution as per their requirements and financial conditions. This is a great advantage for the economically lower sections of the society, as they have access to a pension plan that gives them the option to build up a retirement corpus as per their abilities.
Prudently Regulated: NPS is regulated by PFRDA in every possible aspect. Regular monitoring and frequent performance reviews of fund managers ensure that the subscribers are getting maximum benefits from their investments. Such detailed monitoring also ensures that there are no possible problems or impending issues are taken care of well before they become difficult to manage.
Grievance Management: NPS also has an efficient grievance management system. These include the CRA and PFRDA online platforms, call centres, and postal mails. With the help of these efficient systems, subscribers can ask for any type of information, request redressal and claim their investments benefits to which they are entitled.
Transparency: Subscribers have the right to receive all the necessary information about their investment. PFRDA ensures this by maintaining transparency at all levels. Subscribers can view the status of their funds by visiting their fund manager’s website.
- Low Cost: NPS is acknowledged as the world’s most cost-efficient investment option because of its low fund management charges (it is currently 0.01% pa of the fund value). Also, CRA charges for every transaction is Rs. 4. Details of these charges and fees are provided in a separate section below.
The Government encourages the NPS through various tax benefits under the Exempted-Exempted-Taxed (EET) mode. This means that the amount invested is allowed as a deduction up to specified limits (details below) from one’s income. The interest earned on the corpus during the period before maturity is also non-taxable. While EET schemes usually tax the amount on maturity, this has been relaxed for the NPS. Under the scheme and the current tax structure, the subscriber is taxed for only 60% of the corpus amount on maturity while the remaining 40% stays tax-free.
NPS investments up to Rs. 1.5 lakh in a fiscal year are eligible for complete deduction under section 80CCD(1) of the Income Tax Act. This deduction comes under the overall limit of Rs. 1.5 lakh allowed under section 80C. For salaried subscribers, the deduction is capped at 10% of his / her basic salary and dearness allowance, while this deduction is limited to 10% of the total gross income for self-employed individuals.
Subscribers can now also claim an additional benefit of Rs. 50,000 under section 80CCD (1B). This benefit is over and above the Rs. 1.5 lakh limit under section 80C. This means that if the individual has already invested in other pension or life insurance plans that allow him / her to use up the Rs. 1.5 lakh limit under 80C, he or she can further reduce their taxable income by Rs. 50,000 if they invest in the NPS.
- Any contribution from the employer up to 10% of the basic salary and dearness allowance is also eligible for deduction under section 80CCD (2). This deduction is also over and above the limit of Rs. 1,50,000 and Rs. 50,000 provided under the section 80CCD(1) and 80CCD(1B) respectively.
CRA Charges: These charges include a fee of Rs. 50 for account opening, Rs. 4 for every transaction, and Rs. 190 for annual maintenance. The charges are collected through cancellation of units in the subscriber’s fund for private sector employees. For government employees, these charges are paid by their respective governments.
POP Charges: Non-government subscribers have to pay a one-time enrolment fee of Rs. 125 and thereafter 0.25% on every financial transaction. The charges for financial transactions cannot be less than Rs. 20 or more than Rs. 25,000. All these charges are collected upfront. There are no charges for government employees.
- Fund Management Charge: This charge is applied at the rate of 0.01% pa of the fund value for non-government subscribers. This cost is also collected through the cancellation of units in the subscriber’s fund. For government employees who are subscribers, the fund management charges are 0.0102% pa.
Q. How and Where to Open an NPS Account?
A. An NPS account can be opened through the large network of Point of Presence (POP) players. Almost all banks act as authorised entities for services related to opening an NPS account. You can open the NPS account by going to any POP. Each of them is obligated to assist you with the process including filing the necessary forms, undertaking the documentation, and proving and helping with any type of related information.
Q. Can NRIs Open an NPS Account?
A. NRIs can open an NPS account but their contributions are subject to regulatory requirements as per the prescribed guidelines of RBI and FEMA. Both institutions circulate such guidelines from time to time. However, in case the citizenship status of the subscriber changes, the NPS account will be immediately closed.
Q. Can Subscribers who have invested in Other Provident Funds, open an NPS Account?
A. NPS is independent of the subscription to any other fund. Any subscriber who has already invested in other provident funds can open an NPS account.
Q. What are the Documents Required for Opening an NPS Account?
A. While opening an NPS account, the subscribers are required to submit all necessary documents to their POP. These documents include:
- Completely filled subscriber registration form
- Proof of Identity
- Proof or Address
- Proof of Age/Date of Birth
Q. How to Check the Status of Your PRAN Application Form?
A. Subscribers can check the status of their PRAN application form by visiting the CRA website, i.e. https://cra-nsdl.com/CRA/. They can use the 17-digit receipt number provided by the POP-SP or the acknowledgement number allotted by the CRA-FC at the time of submission of their registration form at the POP-SP. Subscribers will receive an email and a message alert respectively on their registered email ID and mobile phone number as soon as their PRAN is generated.
Q. What are the Minimum and Maximum Contribution Requirements for NPS Accounts?
A. The contribution requirements for each type of account differ from each other. 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. 6,000||Rs. 2,000|
|Min. Frequency of Contributions||1 per year||1 per year|
Q. How are a subscriber’s funds managed under the NPS scheme?
A. The funds of the subscribers are managed as per the investment guidelines provided by the PFRDA. Only PFRDA registered fund managers are permitted to use the funds for investment. The investment guidelines are structured in such as way that the funds are only marginally affected by dynamic market conditions. Currently, seven Pension Fund Managers (PFMs) are registered with the PFRDA to manage the funds of both government and private sector employees. The fund managers are:
- LIC Pension Plan
- SBI Pension Plan
- UTI Retirement Solutions
- ICICI Prudential Pension
- HDFC Standard Life Insurance
- Kotak Mahindra Pension
- Reliance Capital Pension
Q. Can subscribers switch their Fund Managing schemes and Fund Managers?
A. NPS allows subscribers to switch their investment schemes. They can realign their investment in asset classes E, C, and G as per their age and future income requirements. They can change their scheme type from Auto Choice to Active Choice and vice-versa. Also, they can change their fund managers anytime they want if they think that a particular manager is offering added benefits.
Q. What is nomination and subsequent nomination process?
A. 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.
Q. Who will receive the investment benefits in the event of death of the subscriber before the age of 60?
A. In the unfortunate 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.
Q. How to withdraw benefits under NPS?
A. 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.
Q. What would be the withdrawal Process if the PRAN of the subscriber is frozen or inactive at the time of withdrawal?
A. 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.
NPS is a key step to provide adequate retirement benefits to the people at large. Better returns than traditional retirement funds and a benevolent tax structure can only make this scheme more popular in the years to come.