Wednesday, March 16, 2011

The National Pension System (NPS) – De-Mystified

The National Pension System is a retirement planning option that has been made available to the citizens of India in the year 2009. Not many people know what it is and how it can be used for retirement planning. The purpose of this article is to elaborate on that scheme and help people understand and use the National Pension System in their retirement plan.

So, lets get started!!!

What is the National Pension System ?

The New Pension System or The NPS as we will be referring to it in this article, is a new voluntary contributory pension scheme introduced by the Central Government through Pension Fund Regulatory and Development Authority (PFRDA) to promote old age income security.
The aim of the NPS is to provide a sumptuous retirement corpus for the working class of India (Something like Social Security in USA) when they retire. Though it is not a compulsory contribution option like Social Security, this scheme is purely voluntary. The scheme is available to all citizens of India who are not Government Employees.

Under the NPS, individuals can open a personal retirement account with the government through the PFRDA and can set aside and save a pension corpus during their work life to meet financial needs post retirement. There are various investment options available for the investors who wish to subscribe to the National Pension System. The amount invested in the scheme earns returns depending on the investment options selected by the investor.

At the time of withdrawal (When the investor retires) the subscribers have to invest a portion of their accumulated pension money under the Scheme to purchase a life annuity from an IRDA regulated life insurance company and the balance may be withdrawn in full. The amount the investor can withdraw and the timeframe after which it can be withdrawn are subject to certain conditions.

Dont worry just yet, we will cover that too ...

Who are the people involved in the National Pension System?

There are many people or rather the correct technical term would be intermediaries involved in the NPS. They are:
1. The Pension Fund Regulatory and Development Authority (PFRDA) of India
2. The Central Record Keeping Agency (CRA)
3. Pension Fund Managers
4. Annuity Service Providers
5. Trust & Trustee Bank
6. Point of Presence

Let’s look into these one by one.

Pension Fund Regulatory and Development Authority (PFRDA)

PFRDA is the regulator for the NPS. PFRDA is responsible for registration of various intermediaries in the system such as Central Record Keeping Agency (CRA), Pension Funds, Custodians, NPS Trustee Bank, etc. The PFRDA also monitors the performance of the various intermediaries and ensure that all stakeholders comply with the guidelines/regulations issued by PFRDA from time to time.

The most important responsibility of the PFRDA is to ensure that the interest of the Citizens who invest in the scheme are protected which essentially means they are there to look after our best interest.

Central Record-keeping Agency (CRA)

The record-keeping, administration and customer service functions for all subscribers of the New Pension System will be centralized and performed by the CRA. The CRA will, on the basis of instructions received from subscribers, transmit such instructions to the appointed Pension Funds on a regular basis. The CRA will also provide periodic, consolidated PRAN statements to each subscriber.

The National Securities Depository Limited (NSDL) has been appointed as the CRA for the NPS.

Pension Fund Managers (PFMs)

The money deposited by investors is invested into a pension fund which is managed by designated fund managers. There are a few leading professional firms that have been appointed to act as the Pension Fund Managers. They invest the subscriber’s money into various schemes like equities or bonds etc for further investment.

The Pension Funds are required to invest strictly in accordance with the guidelines issued by the government and PFRDA. The NAV of each and every scheme in the Pension Funds would be communicated to the CRA and the investors regularly.

NPS allows you to choose from any one of the following six entities as PF to manage your pension fund:
1. ICICI Prudential Pension Funds Management Company Limited
2. IDFC Pension Fund Management Company Limited
3. Kotak Mahindra Pension Fund Limited
4. Reliance Capital Pension Fund Limited
5. SBI Pension Funds Private Limited
6. UTI Retirement Solution Limited
7. Annuity Service Provider (ASP)

Annuity Service Providers:

The Annuity Service Providers are responsible for delivering a regular monthly pension to the investor after they attain their retirement age of 60 yrs. The PFRDA is in process of appointing the Annuity Service Provider(s) for the NPS accounts. Upon appointment of the same, you will be able to select any Annuity Service Provider for your account as per your choice at the time of withdrawal of contribution from your NPS account or on attaining 60 years of age.

Trust & Trustee Bank (TB)

The Trust established under the NPS, is responsible for taking care of the funds under the NPS and is the registered owner of all NPS assets. The trust holds an account with as the NPS Trustee Bank, i.e Bank of India. NPS Trustee Bank facilitates fund transfers across various entities of NPS system which include, PFM, Annuity Service Providers, subscriber, etc. The NPS Trust is being administered by the Board of Trustees, as decided by the PFRDA.

Point of Presence (PoP)

PoP is the first point of interaction between the voluntary subscriber and the NPS architecture. The PoP is responsible for performing functions relating to registration of subscribers, undertaking Know Your Customer (KYC) verification, receiving contributions and instructions from subscribers and transmission of the same to designated NPS intermediaries.

How to invest in NPS?

The PoP is the entity through which an investor can invest into the National Pension Scheme. The Investor who wishes to subscribe to the NPS can contact the PoP and become an investor in the Pension Scheme.

Types of NPS Accounts

The NPS currently has two types of Accounts available for the subscribers. They are:
1. Tier 1 Account – This is a non-withdrawable account wherein you will not be able to take out your investments until you reach your retirement age of 60 years. If you want to withdraw the money from your Tier 1 account before you reach 60 years, you would be required to invest atleast 80% of the money in your account to purchase a life annuity from an Annuity Provider (Life Insurance Companies). You can only withdraw the remaining 20% of your balance.
2. Tier II Account – To open a Tier 2 account, you need to have an active tier 1 account. You can withdraw your savings from this account whenever you want.

Benefits of Investing in NPS

There are a lot of benefits of investing in the NPS. They are:
1. You can choose the amount you want to set aside and save every year
2. All you have to do is to open an account with any one of the POP and get an Account
3. You can choose your own investment option and Pension fund and see your money grow
4. You can operate your account from anywhere in the country , even if you change your city, job or pension fund manager
5. NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS trust

I know that, by now you will have numerous questions about the NPS. So, in the next article we are going to cover them all.

Happy Retirement!!!


  1. Good one. Keep it up

  2. Wow! Good research on this article. V.Good. I got many info. from this. Thanks.

  3. Is there any guaranteed return? Seems more or less like MF kind of investment!!

  4. Is there any guaranteed return?

    1. @Mahboob

      Yes, it is a MF kind of investment and no, there is no guaranteed returns in market related investments. And since the NPS also invests in the stock market, there is no guaranteed returns like what NSC or PPF give


  5. am working aboard am a25year old person.iwould like to retire after30year .i need a pension plan .i have 3 option .kindly advice which is better for me
    2,lic(jeevan suraksha/jeevan dhara/jeeven nidi)
    3,uti retirement benafit pension plan
    also tellme is there any good pension plan available

    1. I think out of the 3 things you have mentioned LIC would be a better choice.

      I have also read about some retirement/pension plans from private companies like icici or hdfc which may give good returns

  6. sir
    what is the terms and conditions of NPS Swavalamban(i think gonvernment will contribute 1000 rupees/year for this scheme) scheme because my mother want a join a pension it good for my mother.right now she is 48year it not good pls tell me a good pension plan for my mother

  7. @ Anonymous:

    I just wrote an article on the NPS Swavalamban Scheme. click here to read it

    I suggest you choose any pension plan from a government agency like LIC which invests only in debt instruments. remember to confirm this because, stock market is not a preferred/suggested asset class for retirement planning for elderly people.

    hope this helps... if you need anything do drop another comment and please mention your name so that I can relate the answer to your name rather than being anonymous...


  8. Hi,
    I am 33yrs old and planning to join NPS next month.I took this decision after so much of research in various pension funds.But I am little bit confused about choosing the pension fund managers(SBI & UTI).Which among the above 2 are good in dealing the pension funds according to experience and NAV wise ? My plan is to choose the "active choice" and invest in a ratio of 30:50:20 in E:C:G assets respectively.Is that a wise decision ? I like to take a medium risk so which fund manager I have to choose ? Looking forward to you. Thanks in advance.......

    1. @ DV

      I think IDFC or SBI would be a good choice for fund managers. They are both very good among the public sector fund managers and ICICI would be a good choice for private sector.

      Yes, for a moderate risk the profile of 30% equity and rest in debt instruments is a good choice. well done :)

  9. @ DV
    To add on, since I am an NRI, I do not invest in the NPS and am not sure about the performance of the fund managers from any of the AMCs. Whatever I told in my prev comment about SBI or ICICI or IDFC is based on my experience of their performance in mutual funds they manage...

  10. Anand............Thanks million for the guidance......:)

  11. good one hats off to your information. I liked it

  12. Can someone guide me if the employer is opting for NPS for all employees and subsequently on account of fraud if the employer wants to recover some amount from the employee on account of fraud. Can that be done as the account is maintained by PFRDA.

  13. @Harikrishnan

    I think it is possible if the person who committed the fraud is the employee. however for confirmation you may want to check with a lawyer who specializes in EPF and other indian govt schemes

  14. Thanks for the information. Very useful. I have a question though. How is it different from Supperannuation fund? My company provides an option of both National Pension system as well as superannuation fund contribution. Which one should I choose ?

  15. actually speaking both are good. Depending on the amount of contribution your employer is willing to make in either case, you can base your decision.

    on a different note, superannuation funds returns are similar to PF whereas in NPS they invest in the stock market too. So, there is a little risk involved in NPS whereas superannuation has very little

  16. Hey that is a lot of nice information...

    Keep up the good work bro!!!

  17. Nice article Mr. Anand... few queries:

    1) Who are the Fund Managers of ICICI, SBI, UTI, KOtak, LIC?

    2) On a regular basis, how to track the performance of one's NPS account?

    3) Is opening NPS online from say ICICI going to attract more charges when compared to doing the same physically?

    Awaiting for your reply.

    Best regards,
    Saurav Sinha

  18. @ Anonymous

    1) Who are the Fund Managers of ICICI, SBI, UTI, KOtak, LIC? - This is something I have to search and find out. If I find it, I will post it here.

    2) On a regular basis, how to track the performance of one's NPS account? - You should be getting statements regularly about the performance

    3) Is opening NPS online from say ICICI going to attract more charges when compared to doing the same physically? - I dont think so. But, there will be charges which I think are reasonable. The benefit is that, it is online and you save a lot of time and effort. So, I guess paying a fee for that service is ok :)..


  19. This is your blog so beautiful. Here i found great information.

  20. usual rhetoric by indian govt. thes egusy make u sick. this is nothing but a recurring deposit in teh beginining and then a MF. what is teh value being added by govt for NRIs. this can be done by NRI s anytime anyway.

  21. @ Anonymous

    I do agree that some parts of this scheme need improvements but as a whole this is a great pension option for the common man, An NRI is well educated and earning abroad and knows how to save money for retirement but the average common man doesnt. For such a person this scheme is a boon.

    Please do not undermine the efforts of the indian government when the scheme is actually useful to thousands of people


  22. I really want someone's help to understand how NPS works.

    I am doing NPS for two years now, I have invested 2.4lakhs in that so far (1.2lakhs per year).

    All I see is NAV going up and down. Other then that i don't see my money actually growing. So how does this function. If I would have kept 1.2 Lakhs per year on FD at 8.5% interest I would have made 10200/- in an year, here I have not made any money at all.

    The number of units are the same what were purchased by my contribution and I do some units debited off for quarterly expenses, so in practice I am loosing a small amount of money every quarter.

    Some one please help and explain

  23. Mr. Anonymous

    NPS works just the way any ULIP would work. Your money is invested in the stock market (depending on the investment scheme you chose at investment) and your returns will vary based on how the stock markets perform.

    Check your investment documents/statements and check the type of fund chosen. If your risk tolerance is low, select a low risk fund option that invests atleast 80% in fixed income instruments like bonds and then you will see your investment grow.

    Equity investments take time to grow, esp considering the way the markets have behaved over the past few years, short term returns is nearly improbable.

    Last but not least, NPS is a Pension scheme and is not for short term rewards. Wait atleast a few years before you jump into the "This doesnt work" bandwagon.

    More about ULIPS:

  24. Hi Anand

    Really nice info!

    I have a question about superannuation. Is there a specific period for which we need to be employed with a company for getting the superannuation fund? For e.g if someone leaves the company after 2 yrs, then is he eligible for the fund value? Generally, I have heard we have stay 3 yrs in a company for getting superannuation benefits.

  25. @ Anonymous

    Superannuation benefits are available only while you Retire. Usually companies maintain Superannuation with insurance companies like LIC who will pay 25% of your corpus at retirement and the remaining 75% will serve as a pension fund to give you regular income.

    I assume you are asking about Gratuity which you are eligible if you complete 5 years with a single company. It can be paid if you spent a minimum of 5 years with an employer and will be paid when you resign from them.

  26. dear mr annand,
    iam presently working in indian coast guard (ministry of deffence) i joined service in jun 2004..since than i ve been contributing 10% of my basic plus grade pay to contributory pension amount and equal addition by goverment is also being doubt is after say 20 yrs of service what will be my possible there any particular calculation etc,,,,,iam a class I gazzeted officer in pay band three presently...kindly enlighten...also please tell that in future pfrda is coming up with some methodoloigy to calculate the pension,,,,
    vivek dogra

  27. @ Vivek

    I am really sorry. Details related to Government Pension (Esp. Defense) is not available to the public that easily. The amount of pension you get will depend on
    1. No of years of service
    2. Last drawn salary
    3. The grade at which you retire
    plus a host of other conditions

    Unfortunately there is no magic formula.

    All I can say is, your pension will be roughly one-fourth or more of your last drawn salary (Optimistically speaking)

    Sorry for not being much help...


  28. thanks annand for your views..and info provided by you in this subject was really very help full...regards vivek dogra.....kindly tell us about likely pension of a normal central goverment employee who is under nps wef jan will he come to know about his likely pension after 20 yrs...

  29. Anand,

    I have two questions;

    1. I am 52 now. If I am to get a reasonable pension after 60, how much should I invest annualy with NPS?

    2. How do I open an online NPS account?

    Thankx in advance.

    1. Hi Raj Uncle,
      Since you have already crossed 50, NPS or any other form of stock market investment is a NO NO. Even if you are someone who is willing to take significant risk I wouldnt suggest more than 15-20% exposure to equity. As you are very near your retirement age, you do not have enough bandwidth in case the market goes down.

      So, retain atleast 80% of your investments in Bank Fixed/Recurring Deposits and go for Well Performing Mutual Funds for the remaining 15-20% depending on your risk appetite.

      I wouldnt recommend NPS for you because:
      1. NPS will be most useful when you are in your early 30's or even early 40's but not after you cross 50. With less than 10 years investment, any stock market retirement option wouldnt give sufficient returns for the risk taken
      2. At this age, stability & satefy is of utmost importance which none of the stock market instruments can promise.

      Note: Opening a NPS Account online is easy. All you need is a DEMAT Account like ICICIDIRECT or any other similar service. They will guide you step by step in the account opening process once you open your DEMAT account


  30. Hello,.............................
    can u plz clear my following doubts,
    Is NPS better than other pension plans offered by LIC, ICICI etc, if no then which is better one?
    In NPS which Fund Mananger is good out of 7 to go for and can give good returns?

    1. Hi Anonymous,
      The following articles in this blog can shed light on all your questions




      Best wishes

  31. Hi,

    I am working in a Private consultancy Firm can I open a NPS Account?

    Prem Pratick Kumar

    1. Yes. NPS is open to all citizens of India

      This and many more queries that may arise in your mind related to NPS were answered in one of the articles in this blog titled Click Here to read it


  32. Thanks Anand for such a wonderful post. But could you please let us know how the monthly income after retirement will be calculated, any idea?

    1. Hi Girish,
      Usually the monthly income depends on how much money you have accumulated in your account and how many years you want the monthly income. So, it differs from case to case and cannot be generalized :)


  33. Hi Anand,

    Can you inform on the available ways of payment, I do my NPS investments through online SBI, but they deduct Rs 22/- per transaction, so investing bimonthly seems expensive! We can do a one time bulk deposit .

    Please advice.

    1. Hi Ananth,
      The minimum fee per transaction as stipulated by the NPS governing body is 0.25% of the amount contributed with a min of Rs. 20/- and a max of Rs. 25,000/- This 22 rupees is charged by SBI because it has to. Any fee SBI wants to charge you will be over and above this 22 rupees.

      So, if your monthly or bimonthly contributions are small then doing one lumpsum in a year makes sense because the min fee is Rs. 20/-


  34. Anand,

    I have just got the PRAN number today only and was trying to discover the options of making contribution. Do we have some online option like NEFT ? I dont want to make payment through cheque always. I see Ananth is investing through SBI ONLINE, could you please provide more details on that.


    1. Manoj - Please contact the Point of Sale counter (the place you opened the NPS Acc) for this. Yes, online fund transfer/payment facilities are available and all you need to do is signup for the same.

  35. Hi Anand,
    You wrote really well.There is one point you mentioned under Benefits of NPS needs clarification. You said one can decide how much to invest and how much to keep aside.Actually it is 10% of the basic pay+grade pay +da which one has to invest in NPS for employees.

  36. Hi Anand,

    I am working in a private organization for last 5 years and planning to retire after 10 years. I would like to know the following,
    • Am i eligible for monthly pension after my 50/56 years.
    • If i am elgible , am i need to apply (or) amount automatically will be credited in my account
    • If i need to apply monthly pension, what is the process
    • Suppose after 10 years if my basic amont is around 30000K... am i going to get (15years exp * 30000K)/70= 6428.57 !??

    Thanks in advance


    1. Naresh - The calculation you have done is wrong here. Check out the details I have explained her:

    2. Thanks for this good article.

      Prem Pratick Kumar

  37. Dear Anand,
    Depending on your experience & current market trend, which PFM would you advice if you yourself want to invest in NPS. Name any one amongst available options.
    Also, how would u recommend the distribution of investment in a year considering that charges r levied each time when investment is made. In case I want to invest 50k in tier I account to get max tax benefit in a year, should it be 5k per month for 10 months, 10 k once in 2 months 5 times in a year or 50 k at one go in a year ? What would u suggest if I select Auto option ?

    1. Hi Sameer - Every person has their own specific risk appetite and risk tolerance. So, based on the info here, I cannot comment on what is best for your financial needs.

      Ideally - for people in their 20's and 30's higher exposure to Equity is better because of the long term. Also, investing every month gives you cost averaging across market cycles. So, doing the 5k per month every month would be the better idea.

      Unfortunately - I do not provide personalized financial advise for free through this blog. Apologies.


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