Sunday, 17 April 2016

National Pension System (NPS)

The idea of pension plan is to provide financial security and stability during old age when people don't have a regular source of income. Pension plans give an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement.

Rising cost of living and health costs, inflation and life expectancy make retirement planning essential part of today's life. Thus the Government of India has started the National Pension System (NPS) in order to provide social security to more citizens.

Who is eligible to open NPS account

National Pension Scheme (NPS) was started by the Government of India for the benefit of the government employees in the year 2004 because government then decided not to give pension from its own sources to its new employees.

With effect from 1st May, 2009 NPS has been provided for all citizens of the country including the unorganised sector workers on voluntary basis. So now in addition to the government employees and employees of statutory corporations any other person whether employed in private sector or self-employed or businessman or a housewife can join NPS for his future financial security.

The basic purpose of this scheme is to create a pensioned society by providing a source of income for all in old age.

Age eligibility

Individuals who are aged between 18 - 65 years as on the date of submission of his/her application to the POP/ POP-SP. No entry is allowed after attaining age of sixty five years (earlier the upper age limit was 60 years). That rule change to raise upper limit to 65 years make sense as you can contribute to NPS till the age of 70 years now.

Contribution till the age of 70

If a subscriber desires to continue to NPS beyond the age of 60 Years or superannuation, he needs to inform CRA (Central Record-keeping Agency) in writing in the specified form at least fifteen days before the attainment of 60 years of age or the age of auperannuation.

Can NRI open NPS account

Yes, a NRI can open an NPS account. Contributions made by NRI are subject to regulatory requirements as prescribed by RBI and FEMA from time to time. If the subscriber's citizenship status changes, his/ her NPS account would be closed.

How and where to open NPS account

NPS is distributed through authorized entities called Points of Presence (POP's) and almost all the banks (both private and public sector) are enrolled to act as Point of Presence (POP) under NPS apart from several other financial institutions.

These entities have authorized some of their branches to act as collection points and extend a number of customer services to NPS subscribers and these branches are called Point of Presence Service Providers (POPSPs).

To locate the nearest POPSP you can visit

You need to submit the filled NPS subscriber registration form (PRAN application form) at any of the POP along with other documents for the purpose of KYC documentation with respect to proof of identity and proof of address.

You have to ensure that your PRAN application form is filled up properly with all the details like - photograph, signature, mandatory details, scheme preference details(in case of active choice) etc.

Note that ultimately any request for opening/withdrawal will go to Central Recordkeeping Agency (CRA) for registration.

Required documents

  • Completely filled in subscriber registration form
  • Proof of Identity
  • Proof of Address
  • Age/date of birth proof

Nomination Facility in NPS

You need to appoint a nominee at the time of opening of a NPS account in the prescribed section of the opening form. You can appoint up to 3 nominees for your NPS Tier I and NPS Tier II account. You have to specify the percentage of your saving that you wish to allocate to each nominee. The share percentage across all nominees should collectively aggregate to 100%.

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. You will have to visit your PoP and place Service Request to update nominations details.

Permanent Retirement Account Number (PRAN)

Every individual subscriber is issued a Permanent Retirement Account Number (PRAN) card, which has a 12 digit unique number, after the subscriber application is processed. For any further service request PRAN as reference would be required.

Types of NPS accounts

Under NPS two types of accounts are available -

  • Tier-I - This is a non-withdrawable account (though now withdrawal of certain percentage is permitted if you fulfil the criteria) where the individual contribute his savings along with the contribution from his employer. Tier I account is mandatory.
  • Tier-II - This is a voluntary savings facility available as an add-on to any Tier-1 account holder. Subscribers will be free to withdraw their savings from this account whenever they wish. Two important things to note here are -
    • Having a Tier-I account is mandatory for opening a Tier-II account.
    • Tier-II account is for your own saving so there won't be any employer contribution in Tier-II accout.

Swavalamban Scheme or NPS lite

To provide social security for people in unorganised sector Govt has initiated Swavalamban Scheme. It will be applicable to all citizens in the unorganised sector who join the New Pension System (NPS).

Under the scheme Government will contribute Rs. 1000 per year to each NPS - Swavalamban account opened in year 2010-2011, 2011-2012, 2012-2013 for five years as under.

  • Account opened in 2010-2011 will get the benefit till 2014-2015
  • Account opened in 2011-2012 will get the benefit till 2015-2016
  • Account opened in 2012-2013 will get the benefit till 2016-2017

Swavalamban account opened in the period 2013-2014 to 2016-2017 will get the Swavalamban benefit up to 2016-17. This incentive is available till FY 2016-17 and may be extended thereafter.

The benefit will be available only to persons who join the NPS with a minimum contribution of Rs. 1,000 and maximum contribution of Rs. 12,000 per annum.

Investment choices under NPS

NPS offers two approaches to invest your money -

  • Active choice - Here you will decide on the asset classes where the funds are to be invested and their percentage. Note here that in Equity contribution percentage can't go beyond 50%. Other asset classes are government securities and corporate bonds. These assets are referred as E, C and G.
  • Auto choice - For those participants who do not have the required knowledge to manage their NPS investments there is "auto choice" option. In this option the fraction of funds invested across three asset classes will be determined by a pre-defined portfolio.
    At the lowest age of entry (18 years), the auto choice will entail investment of 50% of pension wealth in E Class, 30% in C Class and 20% in G Class. These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in E and C asset class will decrease annually and the weight in G class will increase annually till it reaches 10% in E, 10% in C and 80% in G class at age 55.

Minimum and maximum annual contribution

Unlike PPF, in NPS there is no maximum amount restriction per annum but there are restrictions on the minimum contribution for both Tier-I and Tier-II accounts.
Tier-I Tier-II
Minimum Contribution at the time of account opening Rs. 500 Rs. 1000
Minimum amount per contribution Rs. 500 Rs. 250
Minimum total contribution in the year Rs. 6000 Rs. 2000
Minimum frequency of contributions 1 per year 1 per year

Tax benefits

There are three ways tax deduction can be claimed by investing in the NPS

  • The amount you invest in NPS will be eligible for deduction under Sec 80CCD(1). Remember that this deduction comes under the current overall deduction limit of 1.5 lakhs (FY16-17).
  • Under Section 80CCD (2) the contribution made by your employer is also eligible for tax deduction. Great thing is that it will not be subject to the limit specified in Section 80CCE but it is capped to 10% of Basic + DA maximum.
  • If you have other investments like EPF, PPF and Life insurance premium that exhaust the 80C limit of 1.5 lakhs, don't worry you can still claim deduction for NPS. From FY2015-16 additional deduction of up to Rs 50,000 is available under the Sec 80CCD(1b). This is over and above the Limit of 1.5 lakhs in 80C.

Note that tax benefits are available only in the case of Tier I account not in Tier II account.

Withdrawal rules or Tax treatment of NPS

NPS enjoys Exempt, Exempt and Tax (EET partial) status from income tax point of view. Income accrued to the NPS account is not taxable in the hands of the subscriber.

Post retirement (after the age of sixty) withdrawal from NPS is tax free to the limit of 40% of account balance.

Minimum 40% of the NPS corpus needs to be mandatorily utilized for purchase of annuity. Rest 20% can either be withdrawn in lump sum or can be utilized for purchase of annuity. If withdrawn lump sum it is taxed at applicable tax rate.

To sum it up –

  • 40% of the accumulated corpus can be withdrawn with no tax levied on it.
  • At least 40% has to be used in purchasing annuity.
  • Rest 20%, if withdrawn lump sum, will be taxed at applicable tax rate. If you want to avoid tax you can use that to buy annuity too. In that case 60% of the corpus will be used to buy annuity.

Note that one can defer the withdrawal of the eligible lump sum amount payable under NPS till the age of 70 years that way one can lower the tax liability.

Also note that a subscriber at the time of attaining the age of 60 years can purchase annuity up to 100% of his accumulated pension wealth. If the Corpus is less than or equal to Rs.2 lakhs, there is no need to invest into Annuity. Entire amount can be withdrawn in lump sum

If withdrawn before the age of sixty due to loss of employment or incapability only 20% of lump sum withdrawal is tax free. In this case at least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity providing for the monthly pension of the subscriber. If the Corpus is less than or equal to Rs.1 lakh, there is no need to invest into Annuity. Entire amount can be withdrawn in lump sum

Partial Withdrawal from NPS

Subscriber can withdraw up to 25% of contributed amount towards NPS Account after subscriber is in the NPS at least for a period of 3 years from the date of joining. (Earlier partial withdrawal was permitted only after 10 years).

The subscriber shall be allowed to withdraw only a maximum of 3 times during the entire tenure of subscription under the NPS.

Withdrawal from NPS corpus is permitted for specific purposes like-

  • Higher education of children including a legally adopted child.
  • Marriage of children including a legally adopted child.
  • Purchase or construction of a residential house or flat in his or her own name or in a joint name with his or her legally wedded spouse. If subscriber already owns a residential house or flat individually or jointly, other than ancestral property, no withdrawal under these regulations shall be permitted.
  • Treatment of critical illnesses covering subscriber, legally wedded spouse, children including legally adopted child, dependent parents. Diseases which are covered are as following-

    cancer, Kidney failure (end-stage renal failure), primary pulmonary arterial hypertension, multiple sclerosis, major organ transplant, coronary artery bypass graft, aorta graft surgery, heart valve surgery, stroke, myocardial infraction, coma, total blindness, paralysis, accident of serious/life-threatening nature and any other critical illness of a life-threatening nature stipulated in the circulars, guidelines or notifications issued by the authority from time to time.

Choice of Fund Managers

NPS offers a choice of Pension fund managers.

The subscribers can choose between 8 Fund Managers namely-

  • ICICI Prudential Pension Fund Management Co. Ltd.
  • HDFC Pension Management Co. Ltd.
  • Kotak Mahindra Pension Fund Ltd.
  • LIC Pension Fund Ltd.
  • Reliance Capital Pension Fund Ltd.
  • SBI Pension Funds Pvt. Ltd
  • UTI Retirement Solutions Ltd
  • Pension Fund (PF) to be incorporated by Birla Sunlife Insurance Co. Ltd

Note that the list may change so please check the current list of fund managers.

One Fund Manager must compulsorily be selected. You can switch from one fund manager to another, subject, of course, to certain regulatory restrictions

Annuity Service Providers

  • Life Insurance Corporation of India
  • SBI Life Insurance Co. Ltd.
  • ICICI Prudential Life Insurance Co. Ltd.
  • Bajaj Allianz Life Insurance Co. Ltd.
  • Star Union Dai-ichi Life Insurance Co. Ltd.
  • Reliance Life Insurance Co. Ltd.
  • HDFC Standard Life Insurance Co. Ltd.

Note that the list may change so please check the current list of Annuity service providers.

Different types of annuities

The following are the generic annuities that are offered by Annuity Service Providers to the subscribers of NPS. However, some of the ASP's may offer some variants which have slightly different or combination type of annuities.

  • Pension (Annuity) payable for life at a uniform rate to the annuitant only.
  • Pension (Annuity) payable for 5, 10, 15 or 20 years certain and thereafter as long as you are alive.
  • Pension (Annuity) for life with return of purchase price on death of the annuitant (Policyholder).
  • Pension (Annuity) payable for life increasing at a simple rate of 3% p.a.
  • Pension (Annuity) for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
  • Pension (Annuity) for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
  • Pension (Annuity) for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant and with return of purchase price on death of the spouse. If the spouse predeceases the annuitant, payment of annuity will cease after the death of the annuitant and purchase price is paid to the nominee

Points to note

  • Joint accounts are not permitted under NPS, only an individual can open NPS account.
  • Multiple NPS accounts for a single individual are not allowed.
  • There are two types of NPS accounts Tier-I and Tier-II.
  • At present, a subscriber cannot avail a loan against his/her NPS holdings.
  • NPS offers two choices of investment Auto choice and Active choice.
  • Exposure to equity cannot go beyond 50% under any of the two choices.
  • After retirement (at the age of 60) 40% of the accumulated corpus has to be used in buying an annuity.
  • If retiring before the age of 60 and want to withdraw the accumulated NPS corpus in that case at least 80% of the accumulated pension wealth of the subscriber needs to be utilized for purchase of an annuity.

That's all for this topic National Pension System(NPS). If you have any doubt or any suggestions to make please drop a comment. Thanks!

Related Topics

  1. EPF Vs NPS: Which Is Better
  2. National Pension System(NPS) Investment Choices - Active or Auto
  3. Tax Exemption Benefits of National Pension System(NPS)
  4. Drawbacks of NPS
  5. EEE EET ETE Explained

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