Introduction

As a person’s retirement age comes closer, he/she always has a fear in mind about the changes that will take place after their retirement. The most important thing that changes after retirement is that the earnings of a retired person cease. And what most of us forget while living our lives at a fast pace is planning for the retirement. Most of us forget planning for the retirement and regret for not doing so. These days retirement planning has become all the more important because of an increased cost of living and life expectancy.

The most important part of retirement planning is the pension plan. Pension plans provide financial security and stability during old age when people do not have a regular source of income. A Pension Plan is a plan or a product, which promises you a pension i.e. a fixed regular income after you retire, for a certain period of time. You invest in the pension plan by paying a regular premium or amount. Your amount is invested so that it grows. When you retire, your invested amount would have grown to a certain amount. From this amount or the corpus, you will receive a certain amount of money, called annuity on a regular basis. Retirement plan ensures that people live with pride and without compromising on their standard of living during their retirement years. Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement. To provide social security to more citizens the Government of India has started the National Pension System.

What is National Pension System?

National Pension System is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account. Under the NPS, the individual contributes to his retirement account and also his employer can also co-contribute for the social security/welfare of the individual. NPS is designed on Defined contribution basis wherein the subscriber contributes to his account, there is no defined benefit that would be available at the time of exit from the system and the accumulated wealth depends on the contributions made and the income generated from the investment of such wealth.

Initially, NPS was introduced for the new government recruits (except armed forces). With effect from 1st May 2009, NPS has been provided for all citizens of the country including the unorganized sector workers on a voluntary basis. NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA).The main aim of the government to bring up this scheme is to inculcate the habits of saving for retirement amongst us.

Unique Permanent Retirement Account Numbers (PRAN) is allocated to each subscriber under the NPS at the time of their joining. Subscribers are also allocated two accounts, which they can access at any time.

•             Tier I Account –

Under this account, withdrawals are not allowed. It is only meant for savings after the subscriber’s retirement. It can only be withdrawn only at the time of exit.

•             Tier II Account-

Under this account, a subscriber is free to make as many withdrawals as he or she likes at any time. It is similar to a regular savings account. No tax benefit is available on this account.

Benefits of NPS

1. Dual benefit of Low Cost and Power of compounding –

   The account maintenance costs under NPS are the lowest as compared to similar pension products available in India, like retirement plans offered by Insurance companies and mutual funds.  While saving for a long-term goal such as retirement, the cost matters a lot. Over 35-40 years, the charges can reduce a significant amount from the corpus.

Till the retirement pension wealth accumulation grows over a period of time with a compounding effect. The account maintenance charges being low, the benefit of accumulated pension wealth to the subscriber eventually become large.

2. A flexible investment option:

   Subscribers have control over the choice of investment made and the fund manager who manages the investments.  Subscribers can switch from one investment option to another or from one fund manager to another subject to certain regulatory restrictions.

3. Tax benefits:

Investing in NPS also helps you to avail income tax benefits. The detailed information about income tax benefits for NPS is given below.

4. A safe retirement fund:

   Introduced by the Government of India and regulated by the Pension Fund Regulatory & Development Authority (PFRDA).

5. It is transparent –

NPS is a transparent and cost-effective system wherein the pension contributions are invested in the pension fund schemes and the employee will be able to know the value of the investment on day to day basis.

6. It is simple –

   All the subscriber has to do, is to open an account with his/her nodal office and get a Permanent Retirement Account Number (PRAN). This unique account number will remain the same for the rest of subscriber’s life and can be used from any location in India.

7. It is portable –

   Each employee is identified by a unique number and has a separate PRAN which is portable i.e., will remain same even if an employee gets transferred to any other office.

Eligibility

A citizen of India, whether resident or non-resident, subject to the following conditions:

Applicant should be between 18 – 60 years of age as on the date of submission of his/her application to the POP/ POP-SP or opening account online on e-NPS platform.

Applicant should comply with the Know Your Customer (KYC) norms as detailed in the Subscriber Registration Form. All the documents required for KYC compliance need to be mandatorily submitted.

The NPS offers two approaches to invest subscriber’s money:

1. Active choice –

   Here the individual would decide on the asset classes in which the contributed funds are to be invested and their percentages. The different asset classes available are as follows:

• Asset class E (maximum of 50%) – investment is majorly in the equity market instruments
• Asset Class C-investment will be in government securities
• Asset Class G – investment will be in fixed income securities other than government securities such as liquid funds, fixed deposits etc.

2. Auto choice –

   Lifecycle Fund- This is the default option under NPS and wherein the management of investment of funds is done automatically based on the age profile of the subscriber

Three Life Cycle funds are available under this Auto Choice:

1. Aggressive Life Cycle Fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 75% till age 35 and gradually reduces as per the age of the subscriber.
2. Moderate Life Cycle Fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 50% till age 35 and gradually reduces as per the age of the subscriber.

3. Conservative lifecycle fund: In this Life Cycle Fund, the exposure in Equity Investments starts with 25% till age 35 and gradually reduces as per the age of the subscriber.

An auto choice is suitable for candidates who do not have adequate knowledge to manage their NPS investments and an active choice is for those who have the required knowledge to manage their NPS investments.

The money invested in NPS is managed by the pension fund managers appointed by PFRDA. At present, there are 8 Pension Fund Managers (PFM’s) who manage the subscriber funds at the option of the subscriber.

At present, Subscriber has the option to select any one of the following 7 pension funds:

1. ICICI Prudential Pension Fund
2. LIC Pension Fund
3. Kotak Mahindra Pension Fund
4. Reliance Capital Pension Fund
5. SBI Pension Fund
6. UTI Retirement Solutions Pension Fund LIC Pension Fund
7. HDFC Pension Management Company

Contribution

a.  Minimum Contributions (For Tier-I)

Minimum contribution at the time of account opening and for all subsequent transactions- Rs.500

Minimum contribution per year – Rs.6000 excluding charges and taxes Minimum number of contributions in a year – 01

b.  Charges and Penalty for non-compliance of mandatory minimum contributions

If the subscriber contributes less than Rs.6000 in a year, his/her account would be frozen and further transactions are allowed till the account is reactivated.

In order to reactivate the account, the subscriber would have to pay the minimum contributions, along with a penalty of Rs.100 per year of default due for the period of dormancy.

A frozen account shall be closed when the account value falls to zero. c. Minimum Contributions (For Tier-II)

c.   Minimum Contributions (For Tier-II)

Minimum contribution at the time of account opening – Rs.1000/- and for all subsequent transactions a minimum amount per contribution of Rs.250/-

Minimum Account Balance at the end of Financial Year – Rs.2000/- excluding charges and taxes Minimum number of contributions in a year – 01

d.  Charges and Penalty for non-compliance of mandatory minimum contributions

A penalty of Rs.100/- to be levied on the subscriber for not maintaining the minimum account balance and/or not making the minimum number of contributions.

Charges

All the charges associated with Tier I account including Annual PRA Maintenance charge are paid by the employer. In case of Tier II account, activation charge and transaction charges are paid by the subscriber.

The POP charges and the CRA charges are given in the table below:

REGULATOR AND ENTITIES FOR NPS

1. Pension Fund Regulatory and Development Authority (PFRDA) :

Pension Fund Regulatory and Development Authority (PFRDA) – External website that opens in a new window is an autonomous body set up by the Government of India to develop and regulate the pension market in India.

2. Point of Presence (POP):

   Points of Presence (POPs) are the first points of interaction of the NPS subscriber with the NPS architecture this means that POPs are the different financial institutions who act as the first points of interaction. The authorized branches of a POP, called Point of Presence Service Providers (POP-SPs), will act as collection points and extend a number of customer services to NPS subscribers. The Pension Fund Regulatory and Development Authority (PFRDA) has authorized 58 institutions including public sector banks, private banks, private financial institutions and the Department of as Points of Presence (POPs) for opening the National Pension System (NPS) accounts of the citizens.

   List of POPs offering National Pension System(NPS)

   1. Abhipra Capital Limited
   2. Alankit Assignments Limited
   3. Allahabad Bank
   4. Andhra Bank
   5. Axis Bank Limited
   6. Bajaj Capital Limited
   7. Bank of Baroda
   8. Bank of India
   9. Bank of Maharashtra
   10. Canara Bank
   11. Central Bank of India
   12. Computer Age Management Services Private Limited
   13. Corporation Bank
   14. CSC e-Governance Services India Limited
   15. Dayco Securities Private Limited
   16. DBFS Securities Limited
   17. Dena Bank
   18. Elite Wealth Advisors Limited
   19. Eureka Stock And Share Broking Services Limited
   20. Gujarat Infotech Limited
   21. HDFC Bank Limited
   22. HDFC Securities Limited
   23. ICICI Bank Limited
   24. ICICI Securities Limited
   25. IDBI Bank Limited
   26. IL&FS Securities Services Limited
   27. India Infoline Finance Ltd
   28. India Post NPS Nodal Office
   29. Indian Bank
   30. Indian Overseas Bank
   31. IndusInd Bank Limited
   32. Integrated Enterprises (India) Limited
   33. Karnataka Bank Limited
   34. Karvy Financial Services Limited
   35. Karvy Stock Broking Limited
   36. Kotak Mahindra Bank Limited
   37. LICHFL Financial Services Limited
   38. Marwadi Shares and Finance Limited
   39. Muthoot Finance Limited
   40. Narnolia Securities Limited
   41. NJ India Invest Private Limited
   42. Oriental Bank of Commerce
   43. Prudent Corporate Advisory Services Limited
   44. Punjab and Sind Bank
   45. Punjab National Bank
   46. RBL Bank Limited
   47. Reliance Capital Limited
   48. Religare Securities Limited
   49. SBI Cap Securities Limited
   50. SMC Global Securities Limited
   51. State Bank of India
   52. Steel City Securities Limited
   53. Stock Holding Corporation Of India Limited
   54. Syndicate Bank
   55. Tamilnad Mercantile Bank Ltd
   56. The Federal Bank Ltd
   57. The Karur Vysya Bank
   58. The Lakshmi Vilas Bank Limited
   59. The South Indian Bank Limited
   60. UCO Bank
   61. Union Bank Of India
   62. United Bank of India
   63. UTI Asset Management Company Limited
   64. Ventura Securities Limited
   65. Vijaya Bank
   66. Way2Wealth Brokers Private Limited
   67. Yes Bank Limited
   68. Zen Securities Limited

3. Central Recordkeeping Agency (CRA):

   The recordkeeping, administration and customer service functions for all subscribers of the NPS are being handled by the National Securities Depository Limited (NSDL), which is acting as the Central Record keeper for the NPS.

4. Annuity Service Providers (ASPs):

   Annuity Service Providers (ASPs) would be responsible for delivering a regular monthly pension to the subscriber after exit from the NPS.

5. NPS Trust –

   The NPS trust has been set up and constituted for taking care of the assets and funds under the NPS in the interest of the beneficiaries (subscribers).

Withdrawal/Exit

a. Upon attainment of 60 years of age:

At least 40% of the accumulated pension wealth of the subscriber needs to be utilised for purchase of annuity providing for a monthly pension to the subscriber and balance is paid as lump sum payment to the subscriber. In case the total accumulated corpus is less than Rs.1 Lacs, the subscriber may opt for 100% lump sum withdrawal.

However, the subscriber has the option to defer the lump sum withdrawal till the age of 70 years. A subscriber has also got the option to continue contributing up to the age of 70 years. This option is required to be exercised up to 15 days prior to completion of 60 years.

   b.  At any time before attaining the age of 60 years:

The subscriber may exit from NPS before attaining the age of 60 years, only if he has completed 10years in NPS. At least 80% of the accumulated pension wealth of the subscriber needs to be utilized for the purchase of annuity providing for a monthly pension to the subscriber and the balance is paid as a lump sum payment to the subscriber.

In case the total accumulated corpus is less than Rs.1 Lac, the subscriber may opt for 100% lump sum withdrawal

    c.  Death of the subscriber:

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

Under National Pension System, PFRDA has entrusted the responsibility of receiving, processing and settlement of all withdrawal claims made to Central Recordkeeping Agency (CRA) and CRA have created a special NPS claim processing cell (NPSCPC) for this purpose for handling all types of withdrawal claims. The CRA will monitor the performance of NPSCPC on the withdrawal processing as per the instructions provided by PFRDA in this regard. At present, the NPSCPC is fully functional.