Things you may not know about the NPS

The National Pension Scheme or NPS has been covered in this blog multiple times in the past and is one of the top viewed articles. The article titled The National Pension System - De-Mystified covered the basic details about NPS and the article titled National Pension Scheme (NPS) - All your Questions Answered!!! tried to answer the possible questions you may have had about NPS. In August 2012, I wrote an article titled Is National Pension Scheme (NPS) A Worthwhile Investment Option? where we analyzed the fact that NPS Funds have outperformed many other investment options. Of late, there is significant interest in NPS because of the fact that NPS schemes have been able to give better returns than regular investment schemes.

Though the above 3 articles cover a lot of information about the National Pension Scheme, there are a few things that many investors do not know about the NPS. The idea behind this article is to dig deep and uncover those points so that people can reap the most benefit out of this wonderful scheme...

Unknown No. 1: You can use Your Employer to avail more Tax Benefits

Did you know that there is something called an NPS Corporate Investment Option?

Most of you are aware of the NPS Individual Scheme which gives tax deductions of up to Rs. 1 lakh ever year under Section 80C. However, under the Corporate NPS scheme, the limit is much higher. Under corporate NPS, your employer's contribution to your NPS account, subject to a maximum of 10% of your basic plus dearness allowance (DA), will not be included in your taxable income.

For ex: Let us say, your annual salary is Rs. 10 lakhs of which Rs. 6 lakhs is Basic + DA (Rs. 50,000 per month)

Your employer agrees to contribute Rs. 5,000/- every month towards your NPS account, your effective taxable salary comes down by Rs. 60,000/- every year. This Employers contribution towards NPS is not included in your annual taxable salary.

If you are someone in the 30% tax slab, you are effectively taking of Rs. 18,000 from your Tax Liability per year.

Note:

This does not mean your employer is going to be burdened more or is paying you more. Absolutely not. He is just deducting a portion of your basic salary and paying it towards your NPS account. Your monthly take home salary will come down accordingly but, your tax liability comes down as well plus you are saving money for your future.

Remember - Employers these days have started including NPS as part of the standard compensation package just like EPF, Gratuity etc. All that is required here is some commitment and effort your employers part to restructure the pay packages of their employees to help them get the maximum tax benefits. Plus, I read somewhere that Employers can deduct this as business income for their tax purposes and reduce their tax liabilities as well.

Note:

No matter how high your salary is, only 10% of your Basic + DA can be deducted from your taxable salary, if it is contributed by your employer every month towards your NPS Account. However, your individual contribution will still come under the Section 80C and will be subject to the 1 lakh upper limit. If you contribute lets say Rs. 25,000 per month to NPS, your tax benefit will still be Rs. 1 lakh only.

TO DO:

Talk to your employers Finance Department about tweaking your salary structure. You can remove any existing allowances which you may not use and is fully taxable and direct that towards NPS. Your employer may or may not agree to your request immediately. But, if more employees turn up requesting this option, the employer will eventually agree. Strength In Numbers!!!

Unknown No. 2: Investing In Equity Schemes is not Mandatory

One of the main reasons why people are scared about investing in NPS is the fact that, they invest in Equities as well. The unfortunate part here is that, most people do not know the fact that, Investing in Equity Schemes is not Mandatory.

There are three schemes in NPS:

1. Scheme E or equity fund option (maximum of 50% of one's investment)
2. Scheme G or gilt fund option, and
3. Scheme C or corporate bond fund option.

As you can see, as the investor you can choose to invest 100% of your monthly contributions in just the Schemes C & G. Some people choose the Auto option. Even in that option, only 50% of your corpus will go into equities and the rest will go only into Scheme G or C.

Note:

Equity exposure in NPS is restricted to stocks that have derivatives. This means that in India you have approx. 150 odd stocks, mostly blue chips and large caps which fall into this bucket. These aren't small-caps or mid-caps and are therefore much more stable in terms of price.

TO DO:

If you did not open an NPS account for fear of investing in Equities, just relax and go open an account by choosing Schemes C & G as your options. Personally, I would suggest that you retain a 15-20% exposure even if you are the most conservative investor because, in the long run, Equities have always been the best investment product and you will not regret the decision. At the end of the day even Schemes C & G have done really well and with compounding of interest for many many years until you retire, even this can help you accumulate a Sizeable Retirement Corpus.

Unknown No. 3: You can Do a One-Time Lump Sum Withdrawal at Retirement

Question No. 29 in the article titled National Pension Scheme (NPS) - All your Questions Answered!!! in our blog dealt with the question on withdrawal of our corpus at retirement. Though the answer was correct at the time the article was written, there have been some recent developments that made the answer incorrect - Today.

Through a recent change in policies, NPS will now allow you to withdraw the 60 per cent corpus as a lump sum any time between the age of 60-70. The Remaining 40% has to be used to buy an Annuity plan (Just like before). Earlier, you had to do only a phased withdrawal every year. This recent change gives us more control on what we do with our retirement corpus. We can use it for some purpose or invest it in other instruments as well.

Note: This rule is only applicable at retirement. This does not affect your investments up until you reach your 60 year mark or retire...


Unknown No. 4: Taxation at Maturity

Another big worry for Investors into the NPS Scheme is the Taxation at Maturity aspect. There are currently rumors going around that the Direct Taxes Code has proposed to make the Maturity Proceeds tax free at the hands of the Investor. Though this proposal hasn't been approved yet, there is a pretty good chance that it will be approved by time you and I retire (which is at least 10 years or more from now)

In the odd-chance that the Maturity corpus is taxable, there is not much to worry either because, post retirement we will obviously fall under lower tax brackets. So, the actual tax we may end up paying will be little or even none.

So, for now, let us just concentrate on investing and building our retirement corpus using NPS as one of the instruments. Eventually the DTC Tax Code will make the maturity proceeds tax free which will just be the icing on the cake.

Happy Investing!!!

Is National Pension Scheme (NPS) A Worthwhile Investment Option?

Around a year and a half ago, I wrote an article titled The National Pension System – De-Mystified in which we had taken a detailed look at this National Pension Scheme (We will refer to this as NPS throughout this article) that the Government of India started in 2009. A few days later there was a subsequent article titled National Pension Scheme - All your Questions Answered!!! in which I had tried to answer our blog readers questions on the NPS. It has been over 3 years now since the Government of India started the NPS. The purpose of this article is to analyze if the NPS Schemes have lived up to their expectations and the future course of action for the Indian Investor

How the Different NPS Fund Houses have performed over the Past 3 years

As outlined in the article introducing the NPS, there are several Fund Managers that an investor can choose from when he/she opens the NPS Account. Each of these fund managers may choose to invest in a different set of instruments and hence the returns will not be uniform. As a general categorization, the NPS Fund Managers manage 3 categories of funds in Tier 1:

a. Category E – Equities
b. Category C – Corporate Bonds
c. Category G – Government Securities

Different Fund Managers have performed differently in each of the above categories. After gathering details about the performance of each of the different fund managers, I have shortlisted the best or rather top 3 performers in each category over a 3 year time period. They are:

Equities – Category E Funds:
1. Kotak – 6.82%
2. ICICI Prudential – 6.43%
3. IDFC – 4.98%

Category Average Returns = 5.58%

Corporate Bonds – Category C Funds:
1. Kotak – 12.05%
2. ICICI Prudential – 11.59%
3. IDFC – 9.24%

Category Average Returns = 9.97%

Government Securities – Category G Funds:

1. Kotak – 7.95%
2. ICICI Prudential – 7.7%
3. UTI – 7.5%

Category Average Returns = 7.32%

Note:

All returns above are over a 3 year period. Don’t be amazed by the dismal returns generated by the Equity funds. The Indian stock market has been extremely volatile over the past few years and a positive returns % indicates the fact that the fund managers have done a great job.

As you can see, the funds managed by Kotak and ICICI Prudential have been the top 2 in all of the categories.

Is the NPS Scheme Popular?

The simple answer would be – NO…

If you wish to dispute this claim and say that NPS is popular, stop for a moment and give me an answer to this question – “Do you have an NPS Account?” The answer you will give in response to this question is the answer to the question above as well…

Problem No. 1: Have you seen any advertisement by any fund house about the performance of their funds in NPS? For ex: the schemes managed by Kotak Pension Fund have churned out the best possible returns in all the 3 categories. ICICI Pru has been the 2nd best performer. So, given this fact, have either of these two fund houses advertised their success? This whole phenomenal success has gone almost unnoticed. Nobody publicized the fact that their schemes in NPS were successful. Whereas, the same Kotak and ICICI Pru fund houses always advertise their best performing Mutual Fund Schemes. Why this disparity???

Problem No. 2: Have you seen anybody trying to sell NPS Schemes to investors? The NPS has approx. 25 lakh investors out of which almost everyone is from State & Central Government for whom NPS is compulsory. The distributors are not selling NPS at all. In fact, less than 50,000 people have voluntarily invested in NPS in the past 3 years. Why do you think this is happening?

Why Fund Managers are not advertising their Schemes in NPS?

The simple answer is – MONEY!!!

The fees that fund managers receive for managing the NPS schemes is nothing short of dismal. The fund management charge is 0.0009% which means, a fund manager get Rs. 9/- for managing Rs.10,00,000/- for one year. The average fee for managing a similar number in Mutual funds works out to a 4 digit number and the same for ULIPs is a 5 digit number.

Why Distributors are not selling NPS Schemes?

The simple answer to this question too is – MONEY!!!

I could not find the actual commission/fee that Distributors get for selling NPS but I would assume it will be around the same range as what the fund managers get. If the fee the person who manages the money (Fund Manager) is only Rs. 9/- for a 10 lakh investment, what do you think the distributor will get for selling NPS Schemes? Distributors feel that the profits they earn out of selling this low-cost scheme does not justify the amount of money or resources that go into selling it.

What is being done to fix this?

The PFRDA has been contemplating increasing these fee & commission charges that the distributors and fund managers receive for dealing with NPS. Hopefully this upward revision of fee will be the much needed boost to both the fund managers as well as distributors to take NPS Seriously.

However, a point to note here is that, no concrete numbers have been released by the PFRDA yet. However, it is expected to come out very soon. But, experts from the industry feel that the number would be around 0.25% (Rs. 2,500/- per Rs. 10 lakhs) which is a sizeable increase when compared to the current dismal figures.

Will this affect the Investor?

Of Course, it will. However, the impact will be almost negligible. Mutual Funds charge around 1-2% per year and ULIP’s charge even more. If we consider a 0.25% fee for the fund manager and the same for the distributor, for every 10 lakhs you invest, 9.95 lakhs is going to be effectively invested which is much higher than what happens in the case of Mutual Funds or ULIPs. So, it is safe to say that the impact will be very minimal.

How Increasing the Fee’s will help?

First of all, if the fee fund managers get is reasonable for the effort they spend managing the money, they will start advertising the fact that they are managing X Crores of money for NPS. Second of all, if distributors can make a reasonable income by selling NPS products, they will start advertising as well as selling NPS Schemes to investors. So, it will be a WIN-WIN Scenario.


Is National Pension Scheme (NPS) A Worthwhile Investment Option?

Of Course – YES.

Frankly speaking, the NPS Schemes are managed by the same expert fund managers who manage the top mutual fund schemes of India. So performance wise it would be safe to say that NPS schemes will fare at around the same level as regular mutual funds.

More importantly, the fee’s charged by NPS is the least in the industry. Even if we assume a 0.25% fund management fee and a 0.25% distributor fee, the overall fee’s paid works out to less than 1%. The fees and charges for Mutual Funds and ULIP’s or other Pension Plans is much higher. So, effectively more of our money will get invested and in turn, we will get better returns.

To further substantiate my claim that NPS is a better investment option than a ULIP Pension Plan – due to the lower fee structure, the next article is going to be a comparison in terms of overall returns between the NPS and ULIP Pension Plans.

If you are still not too sure if the NPS is a good investment option in comparison to the regular ULIP Pension Plans that are being sold aggressively, just relax, the feeling is very common. The next article will be a simple returns comparison between the two products to help you decide...

Happy Investing!!!

NPS Swavalamban Scheme

There was a query from one of our Blog Readers who wanted to know about the NPS Swavalamban Scheme. Since it is a detailed topic in itself, I thought, it would be more useful if I write a separate article instead of just responding to the comment as a reply comment. So, here we go!!!

What is the Swavalamban Scheme?

The Swavalamban Scheme is a sub-scheme under the NPS Scheme which we covered in great detail in our blog. This scheme is applicable to all citizens of India who are in the unorganized sector & meet the eligibility criteria, who join the NPS in the year 2010-2011. Under this scheme, the Central Government will contribute Rs. 1000 per year to each NPS account opened in the year 2010-2011 and for the next 3 years 2011-12, 2012-13 and 2013-14. To benefit the citizens who opened their accounts in 2009-10, the government has declared that, they will also be entitled to the benefit of the Swavalamban scheme, that is if they meet the eligibility criteria.

What is the Eligibility Criteria?

There are two important criteria:

1. The citizen must belong to the unorganized Sector and
2. The citizen must make a minimum contribution of Rs. 1000 and a maximum contribution of Rs. 12000 per annum for both the Tier 1 and Tier 2 accounts taken together.

Though the second eligibility criterion is very simple, the 1st one is a bit confusing, isn’t it?

What is the Unorganized Sector?

For the purpose of this scheme, a person will be considered as belonging to the unorganised sector if that person:

1. Is not in regular employment of the Central or a state government, or an autonomous body/ public sector undertaking of the Central or state government having employer assisted retirement benefit scheme, or
2. Is not covered by a social security scheme under any of the following laws:
       a. Employees’ Provident Fund and miscellaneous Provisions Act, 1952
       b. The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948
       c. The Seamen’s Provident Fund Act, 1966
       d. The Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955
       e. The Jammu and Kashmir Employees’ Provident Fund Act, 1961

So, if you meet the above 2 criteria and are eligible, you can get Rs. 1000/- for 3 years, which is Rs. 3000/- in all as an extra motivation to invest in this scheme.

Who gives this extra money?

Of course, the Government of India gives …

Why is the Government doing this?

Since this scheme is aimed at being a retirement corpus for the citizens of India, the government has to motivate the people to join it and what better motivation than giving some extra money to the common investor?

What if someone doesn’t meet the eligibility criteria but still applies for it?

If someone doesn’t qualify for this benefit but still claims falsely that he/she is eligible and applies for this scheme, the government reserves the right to reclaim the money credited to their account along with interest & any penalties for providing false information.
Hope this covers enough info about the Swavalamban Scheme. If you need any other info, you know what needs to be done…

Just leave a comment and I will see what I can do.

Happy Retirement!!!

National Pension Scheme (NPS) - All your Questions Answered!!!

In the previous chapter, we saw what the National Pension Scheme or the New Pension Scheme is and what the purpose of that scheme is. By the end of the chapter, you would have got a few or rather a lot of questions related to the scheme. If you had, don't worry about searching the internet for the answers because, this chapter is going to do it for you.

So, lets get started!!!

1. Who can invest in NPS?

Any Indian citizen between the age of 18 to 60 years can invest in NPS. However, persons having an existing NPS account and government employees who are already covered under NPS cannot again open an additional account under NPS.

2. Can an NRI open an NPS account?

Yes. An NRI can open an NPS account if the NRI has a bank account with a bank based in India. Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time.

3. What if my citizenship status changes after I open a permanent retirement account under NPS?

NPS is available only to citizens of India. If the subscriber's citizenship status changes, his/ her NPS account would be closed.

4. If I have invested in any other Provident Fund, can I still invest in NPS?

Yes. Investment in NPS is independent of your contribution to any Provident Fund.

5. I have invested in pension funds of non government / private entities. Can I still invest in NPS?

Yes. Investment in NPS is independent of your subscription to any other pension fund. It is a purely voluntary scheme and the investor can make the decision to choose the NPS or any other private entity that provides pension schemes (like ICICI or HDFC)

6. Are there any online trading websites that provide NPS Subscription facilities?

Per my knowledge, ICICI Direct website provides this facility

7. What is PRAN?

PRAN stands for Permanent Retirement Account Number. Every individual who invests in the NPS will be allotted a PRAN.

8. How will I know my PRAN?

After your NPS / permanent retirement account is opened, CRA will intimate you about your PRAN by issuing a PRAN allotment letter.

You will also receive a Telephone Password (TPIN) and Internet Password (IPIN). The TPIN can be used to access your NPS account on the call centre number of CRA (1800222080). While your IPIN can be used to access your account on CRA website (www.npscra.nsdl.co.in) on a 24 x 7 basis.

9. Are there any conditions for making contributions to the NPS account?

Yes. PFRDA has specified the minimum contribution that is to be made in a financial year for each type of NPS account. Further, you are required to make your first contribution at the time of applying for registration with a Point of Presence (POP).

Additionally, the following conditions apply for each of the below accounts.

Tier I:
Minimum amount per contribution - Rs. 500 /-
Minimum contribution per year - Rs. 6,000/

Tier II:
Minimum amount at the time of account opening - Rs. 1,000/-
Minimum Amount per contribution - Rs. 250/-
Minimum Balance to be maintained at the end of the Financial Year - Rs. 2,000/-

You may decide on the frequency of your payments during the year as per your convenience. Further, you may also contribute the entire minimum contribution amount as detailed above at the time of registration itself.

10. Will the government also contribute anything to my NPS account?

No. The Government will not be making any contribution to your NPS account.
The Government of India may however, make contributions to the accounts of NPS account holders who opt for Swavalamban scheme subject to conditions stated in Swavalamban scheme. (The details of the Swavalamban scheme is out of scope for this article and we shall look into it in future)

11. What will happen if I do not make the minimum contribution during any financial year?

If you do not make your minimum contribution during any financial year, your account would go into “Defaulted” status.

In case of a default:

You will have to pay a default penalty of Rs. 100 per year of default and further CRA will mark your NPS account as dormant on the last date of that financial year.
To reactivate your account, you will have to pay the aggregate of the outstanding amount of the minimum contribution due for each year that your account is dormant and the applicable penalty amount per year. For instance, if your account has become dormant due to non payment of minimum contribution and you have already contributed say Rs. 3000/- during the year to your NPS account. Now, to reactivate your account, you will have to contribute the outstanding minimum contribution ie Rs. 6,000/- less Rs. 3000/- = Rs. 3000/- plus penalty of Rs. 100/-

A dormant account shall be closed when the value falls to zero.

The fee structure may change as may be decided by the PFRDA/ NPS Trust from time to time.

12. Is there any maximum age limit for making further contribution to NPS Tier I Account?

Yes. You can make contribution in your NPS accounts only till you have not completed the age of 60 years. After attaining 60 years of age, you will not be permitted to make further contributions to the NPS accounts.

13. Can I transfer my savings amount from NPS Tier II account to NPS Tier I account or vice versa?

No. You cannot transfer savings from one NPS account to the other.

14. How do I pay the charges or fees applicable to my NPS transactions?

The charges applicable on your NPS transactions and service tax amount payable thereon shall be deducted from your contribution amount and the balance amount will be invested in your NPS account.

Note: Details of the fees payable for investments can be found in the NPS offer document. This fees are subject to change from time to time by the PFRDA and will be intimated to the investors.

15. How do I select the Pension Fund Manager for my NPS savings?

You can select your Pension Fund Manager at the time of applying for the NPS Scheme. The list of available fund managers is available in my previous article and you can refer to it by clicking here


16. Can I select more than one PFM to manage my savings?

No. You can select only one PFM.

17. What is meant by Investment Choice?

Investment Choice refers to the feature by which the subscriber specifies the manner in which his contribution is to be invested. The contributions made by you towards the NPS account shall be invested by the Pension Fund Manager based on the asset class allocation given by you, and the value of the pension corpus shall be totally based on the NAV of the schemes. You can choose, equities or government securities etc. Details of the different investment choices can be seen in the NPS offer document (And in the next question… Did you think I will let you search for it )

18. What are the various investment choices available in NPS?

The following two investment choices are available in NPS:

(I) Active Choice - Individual Funds (Asset class E, Asset class C and Asset class G) and
(II) Auto Choice - Lifecycle fund

In Active choice, you have the option to actively decide as to how your NPS Pension wealth is to be invested in the following three asset classes:

Asset Class E - investments in equity market instruments
Asset Class C - investments in fixed income instruments other than Government securities
Asset Class G - Investments in Government securities

You will be able to choose from the below-mentioned basket of investment choices:

Equity (Asset Class "E") with a maximum asset allocation of 50% and remaining 50% which can be allocated from Asset Class C and/or Asset Class G

Fixed Income Instruments other than Government Securities (Asset Class "C") with maximum asset allocation of 100% (if allocated singly)

Investment in Government Securities (Asset Class "G") with maximum asset allocation of 100% (if allocated singly)

The overall asset class allocation under the 'Active Choice' option should be equal to 100%

In the Auto Choice option, your funds will be invested across various asset classes in a lifecycle fund as per a pre defined portfolio wherein the Pension Fund Manager shall invest your contribution based on the asset allocation table formulated by PFRDA (based on your age group).

19. Can I select both investment choices when investing in NPS?

No. You have to select either Active Choice or Auto Choice as your option when making investments under NPS. You cannot choose both…

20. Can I change my investment choice?

Yes, you can change your Investment Option [Active or Auto]. After all, it’s your money and you can choose how it is invested.

However, these changes can be made only during the period as specified by CRA / PFRDA. PFRDA will announce the period (from and to dates) during which you can make the said changes.

21. What rate of return will my contributions earn?

There is no guaranteed or suggested rate of returns. The returns earned by your investment would depend on the type of assets you chose to invest and the market performance.

The PFM will invest your savings in a scheme of your choice. Remember that your investment allocation is one of the most important factors affecting the growth of your pension wealth. The rate of return earned by your contribution depends on the return provided by the asset classes you choose to invest in viz equity instruments, fixed income instruments , government securities.

The returns earned by the PFM on the scheme selected by you will be credited to your account.

22. Can I register for NPS without indicating any investment option?

No. You will not be able to register for NPS, unless you have indicated your Investment choice.

23. What is meant by Life Cycle fund in the Auto Choice option?

NPS offers an easy investment option, called "Auto Choice", to assist those customers who do not have the required knowledge to manage their NPS investments.

Under this Option, the investments will be made in a life cycle fund whereby the allocation across various assets will be defined as per your age and will be readjusted as you grow older. When you are younger a higher portion of your funds will be invested in equities and as you grow older, the exposure to equities will be reduced and the exposure to debt instruments will be increased.


24. Can I change the Pension Fund Manager for my pension savings?

Yes, you can change your Pension Fund Manager.

However, as for question 20, this change can be done only in specific timeframe and not all the time.

25. Can I have a different Pension Fund Manager and Investment Option for my Tier I and Tier II account?

Yes. You may select different PFMs and Investment Options for your NPS Tier I and Tier II accounts.

26. Who are the Annuity Service Provider for NPS accounts?

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 Tier I account or on attaining 60 years of age.

As of now, they are not yet appointed/finalized.

27. Where can I view my unit holdings held in the NPS account?

You can view your unit holdings by logging on to the CRA Website. https://cra-nsdl.com/CRA/ using the IPIN provided by CRA.

28. Will I receive a transaction statement on allotment of units in my NPS account?

Yes. An annual statement containing details of your unit holdings will be issued by CRA to your registered address within 3 months of the end of every financial year.

29. Are there any conditions / formalities to be completed for withdrawing money from my NPS Tier I account?

Yes. Following are the conditions stipulated by PFRDA for withdrawing funds from the NPS Tier I account:

On attaining age of 60 years and upto 70 years of age

On exit, you would be required to compulsorily invest atleast 40 % of your accumulated savings (pension wealth) to purchase a life annuity from any IRDA - regulated life insurance company.

You may choose to purchase an annuity for an amount greater than 40%. The remaining 60 % of your pension wealth can either be withdrawn in lump sum on attaining the age of 60 or in a phased manner, between age 60 and 70, at the option of the subscriber.

In case you opt for phased withdrawal, please note:
1. Minimum 10% of the pension wealth should be withdrawn every year
2. Any amount lying to the credit at the age 70 should be compulsorily withdrawn in lumpsum

Death due to any cause In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS pension wealth in lump sum. However, if the nominee wishes to continue with the NPS, he/she will have to subscribe to NPS individually after following due formalities.

Update - As of 12th June 2013:

As per some latest developments 60% of your corpus can be withdrawn in One Lumpsum. You need not do the phased withdrawal as explained above. I am retaining this old answer as well just to show how the NPS policies change over time to benefit us...

30. What will happen to my savings if I decide to retire before age 60?

To withdraw from your Tier I account at anytime before 60 years of age, you would be required to invest atleast 80% of your pension wealth to purchase a life annuity from any IRDA - regulated life insurance company. You may withdraw the remaining 20% of your pension wealth as a lumpsum.

31. Can I appoint nominees for the NPS Tier I Account?

Yes. You can appoint upto 3 nominees for your NPS Tier I account.

You are required to specify the percentage of your saving that you wish to allocate to each nominee. The share percentage across all nominees should collectively sum up to 100%.

32. I have not made any nomination at the time of registration. Can I nominate subsequently?

If you have not made the nomination to your NPS account at the time of registration, you can do the same after the allotment of PRAN.

33. Are there any charges for making a nomination?

If you are making the nomination at the time of registering for PRAN, no charges will be levied to you.

However, a subsequent request for nomination updation would be considered as a service request and you will be charged an amount of Rs. 20/- plus applicable service tax for each request.

34. What is the transmission process to be followed by a nominee in case of death of the NPS account holder?

Incase of the death of the NPS account holder, the nominee(s) may opt to receive 100% of the NPS pension wealth of the deceased NPS account holder in lump sum or may continue with NPS .

In case the nominee (s) opt to withdraw the pension wealth, the nominee (s) are required to submit the withdrawal request to CRA directly with the supporting documents specified in the withdrawal request form.

However, if the nominee wishes to continue with the NPS, he/she will have to subscribe to NPS individually after following due account opening formalities.

35. What is the transmission process in case of death of NPS account holder who has not selected a nominee?

It is advisable that the NPS subscribers indicate their nominee. CRA is in the process of defining the procedure for transmission in case of NPS account holders who have not selected a nominee.

36. Can I raise my queries or complaints directly with CRA?

Yes. The NPS also has a multi layered Grievance Redressal Mechanism which is easily accessible, simple, quick, fair, responsive & effective. You can register your grievance / compliant by calling at the CRA call centre or by registering the grievance on www.npscra.nsdl.co.in.

You will have to authenticate yourself through the use of T-PIN (in case of call centre) /I-PIN (while registering on the site) allotted to you.

On successful registration of your grievance, a token number will be allotted to you for all future references.

37. How can I track the status of resolution of my grievance that I have registered with CRA?

You can check the resolution status of your grievance by logging in to the CRA website www.npscra.nsdl.co.in

If you have raised your grievance through CRA, you may contact the CRA Call Center and enquire about the resolution of your grievance by mentioning the token number. You can also raise reminder through any one of the modes mentioned above by specifying the original token number issued.

38. What can I do if I do not get a response from the CRA?

If you do not receive any response with in 30 days or are not satisfied with the resolution provided by CRA, you can apply to the Grievance Redressal Cell (GRC) of PFRDA

Grievance received by the GRC, directly from the subscribers only shall be entertained. GRC shall not entertain any complaints written on behalf of the subscribers by advocates, agents or third parties unless formally authorized by the subscriber.

Complete address of the GRC of PFRDA is:

Grievance Redressal Cell
Pension Fund Regulatory and Development Authority
1st Floor, ICADR Building, Plot No. 6, Vasant Kunj,
Institutional Area, Phase - II, New Delhi - 110070,
Tel: 011-26897948-49, FAX: 011-26892417,
Email: grcpfrda@gmail.com


Hope this article was able to answer most of your queries related to the NPS. If you have any further queries, don't hesitate to leave a comment and I will see what I can do 

Happy Retirement!!!

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!!!

National Pension Scheme

Of late, the National Pension Scheme (NPS) is one of the most talked about topics among people of our country. The NPS is a new initiative by the government of India to help us.
Retirement is something that every person who is earning needs to plan for. Once we cross the age of 60, our earning potential goes down and we are dependent on our savings for our sustenance. So it is advisable to save some money in our retirement corpus so that we can have a comfortable old age. Unfortunately, for most of us, apart from EPF (Employee Provident Fund) we do not have any saving instrument to save for our retirement. In countries like the US we have Social Security and hence the whole burden of survival after retirement does not fall on the person. But in India we do not have such a feature.
To overcome this problem, the government of India has come up with this NPS.

What is NPS?

NPS is a retirement saving option that can be availed by all citizens of this country. This functions more or less like a ULIP. Our money would be invested in the equity markets and also the debt market. The minimum investment to begin with is Rs. 6000/- per year. The government is going to avail the services of top fund managers from SBI, UTI, Kotak, ICICI etc to manage the corpus. Our money would be saved in Individual Retirement Accounts (IRAs) People who are sure of their risk appetite can choose the type of fund they want their money to be invested in. You can choose high equity exposure or high debt exposure based on your comfort level. For people who are not sure about this can opt for the default option. The default option works in life-stage principle. During the initial phases equity exposure would be high and after 35 years of age, it goes down and debt exposure would increase. This is to provide for capital appreciation when the investor is young and capital preservation as our age goes up.

After our retirement we can withdraw a portion of our IRA corpus as a lumpsum amount and the balance must be compulsorily be invested in annuities that give us a regular monthly income.

How would the NPS Work?

This scheme will have 3 intermediaries:

1. One to collect the contribution
2. One to manage the fund
3. One to take care of the disbursement

To ensure wide distribution, the PFRDA (Pension Fund Regulatory & Development Authority) has authorized 23 players comprising of banks, mutual funds etc through which we can invest in the NPS.

What are the costs involved with NPS?
Since the NPS is floated by the government and is targeted at the common man, the costs involved are not so high. The initial joining fees is Rs. 350/- and a registration fees of Rs. 40/- Once your account is created you will get a Permanent Retirement Account Number (PRAN)

The only incremental cost is the Rs. 20/- transaction fees that has to be paid every time we make a fresh contribution to our account. Apart from this, there is also a fund management fees. This is 0.0009% of our investment which works out to Rs. 9/- per every 10 lakh invested. In contrast a normal mutual fund house would charge us as high as Rs. 22,500/- and a ULIP would cost us even more.

Benefits of investing in NPS:

The NPS has a target audience of nearly 80 million Indians who are employed and are earning. There are a number of benefits in this scheme that would make it attractive for us

1. Simple – The scheme is very simple and easy to understand for the common man
2. Scalable – This scheme has the ability to handle any number of investors
3. Portable – Can be accessed from anywhere in the country
4. Flexible – It offers us varied investment options and also withdrawal facilities. We can make annual or half yearly or even quarterly payments into our IRA
5. Low Cost – This is one of the most important and significant benefits of this scheme. This is by far the cheapest investment option.

Negatives:

As in every investment option, when you have benefits, there would be negatives also. There are certain aspects that we need to consider before investing in the NPS

1. Not Mandatory – This scheme is not mandatory and hence the investment is purely based on individual interest. The purpose of this scheme is to provide retirement corpus for its citizens and since it is not mandatory, it may not serve its intended purpose effectively
2. Low awareness – Though this is a great option of investing for our retirement, the awareness among our public regarding this scheme is very low. Most of our population is not aware of this scheme
3. Low Tax incentives – There are no specific tax incentives available for us to motivate us to invest in this scheme
4. Too early to judge – This is a new scheme and we do not know the kind of returns that we can expect from this scheme. Also everything is theoretical and we are yet to see it functioning.

What should we do now?

This is a new scheme and the PFRDA is expected to pass bills and amendments and activate this scheme. The scheme will be launched on April 1st and nearly 80 million Indians including you and me are eligible to invest in this scheme.
The initial investment amount is very small and we can opt to invest in this scheme with a small amount and based on the kind of performance offered by the fund managers we can opt to increase our yearly investments.

Where can we buy?
As many as 23 institutions have been approved by the PFRDA as PoPs (Points of Presence) for the NPS. All citizens other than government employees covered under the pension scheme can buy NPS through the below centers.

1. Allahabad Bank
2. Axis Bank
3. Bajaj Alliance General Insurance Co.
4. Central Bank of India
5. Citibank
6. CAMS India Pvt Ltd
7. ICICI Bank
8. IDBI Bank
9. Kotak Mahindra Bank
10. LIC of India
11. Reliance Capital
12. State Bank of India
13. Union Bank of India
14. UTI Asset Management Company etc…

Happy Investing!!!