Highlight on New Pension Scheme

Retirement planning has become an inevitable part of any individual’s life. Gone are the yesteryears when Provident Fund deposits and other savings were sufficient to lead a comfortable post- retirement life. In line with the growing need to address the retirement needs for the elderly, Government of India had announced National Pension System (NPS) in the year 2004. Some of the vital features are highlighted to understand this much ignored Investment Avenue.

Who can join: - All resident or non-resident Indians in the age of 18-60 can join NPS voluntarily. However, it is mandatory for Central government employees (except armed forces) appointed on and after January 1’ 2004.

Plan Options: - NPS is aimed at benefiting oneself at his retirement; hence, it has been structuralized in order to discourage withdrawal of invested corpus. Plan options offered are: -

Tier I –

•   Non Withdrawable Account.
• First contribution at the time of applying for registration.
•  Minimum Amount per contribution – Rs. 500
•  Minimum contribution per year – Rs. 6000
•  Minimum number of contribution – 01 per year

Tier II –

• Withdrawable Account but an active Tier I account is pre-requisite for opening Tier II account.
•  No limits on number of withdrawals.
•  All features of Tier I account available for Tier II account.
• One way transfer of savings from Tier II to Tier I available.
•  Minimum contribution at the time of account opening – Rs. 1000/-
•  Minimum amount of contribution – Rs. 250/-
• Minimum Account Balance at the end of FY – Rs. 2000/-
• Minimum number of contribution – 01 per year

     Withdrawal Process: –

1.     At any point of time before 60 years of age- At least 80% of the pension wealth to purchase life annuity from IRDA regulated life insurance companies. Rest 20% could be withdrawn in lump sum.
2.          Age 60-70 - At least 40% of the accumulated corpus to purchase life annuity from IRDA regulated life insurance companies. Annuity for greater than 40% could also be purchased. Rest of the corpus could be withdrawn either in lump sum on attaining age 60 or in a phased manner, between age 60 and 70.
3.           Death due to any cause - Option will be available to the nominee to receive 100% of the NPS pension wealth in lumpsum. However, a separate subscription to NPS required in the even where Nominee wishes to continue NPS.

     Asset Allocation: – NPS provided two options for Asset allocation which is Active choice and Auto choice.

     1) Active Choice – Active choice gives you freedom to choose your own allocation based on your risk appetite.Option to select asset class.

            Asset Class E - investments in predominantly equity market instruments.  

            Asset Class C- investments in fixed income instruments other than Government securities. 

            Asset Class G - investments in Government securities. 

     2)Auto choice - It will invest in a life-cycle fund. The fraction of funds invested across three asset classes will be determined by a pre-defined portfolio. Asset allocation in Asset E will be higher at the lowest age of entry and will be raised in Asset G towards approaching age of 60. 

     Tax Benefit: – Contribution in NPS will enjoy benefit under Section 80 CCD of the Income Tax 

     act;however the aggregate deduction under Section 80C, 80CCC and 80CCD is capped at Rs.One Lakh only.

     Expenses: – The annual fund management charge of NPS is as low as 0.0009%.

     Currently, NPS is not very well accepted as an option over Mutual Funds/Equity, more due to lack of incentive and less for other factors (to be discussed later), we hope it to achieve breakthrough in upcoming years