FAQs on NPS (National Pension System)
Please note: This is mostly an informative article and
can be boring to read but I believe it is good compilation if you seriously
want to understand basics of NPS.
The National Pension System (NPS) is a pension scheme operated by the
Government of India. It is based on a unique Permanent Retirement Account
Number (PRAN) which is allotted to each Subscriber upon joining NPS.
2. Who control NPS in India?
The pension scheme is administered on behalf of the
government by the Pension Fund Regulatory and Development Authority India
(PFRDA). (http://www.pfrda.org.in/)
3. What are
the eligibility criteria for NPS?
NPS is open to all citizens of India between the ages
of 18 and 60 on a voluntary basis. An NRI can also contribute to NPS. This
Scheme can be participated with in addition to PPF and EPF.
No, HUF, OCI and POI are not allowed to join NPS.
4. How NPS works?
The scheme is based on unique Permanent Retirement
Account Number (PRAN) which is allotted to each subscriber upon joining.
Subscriber contributes towards NPS (directly or through the Employer) during
working life. On retirement or exit from the scheme, the Corpus is made
available to subscriber with the mandate that some portion of the Corpus must
be invested in to Annuity to provide a monthly pension post retirement or exit
from the scheme.
5. Can a Subscriber open more than one NPS account?
No. In the entire life span Subscriber will be allowed
to open only one NPS Account. The NPS Account number which is also called PRAN
is fully portable across job and geography.
6. What are the types of accounts?
Under NPS, Subscriber gets the option to open two
accounts known as Tier I account and Tier II account.
A Tier I account is mandatory to open in order to join
NPS. Withdrawal from this account is permitted after 10 years of account
opening or attaining the age 60 years whichever comes early. Minimum annual
contribution required for this account is Rs. 1000.
Tier II account is optional and can be opened at any
point of time – at the time of opening Tier I account or later. Withdrawal from
this account can be done at any point of time as per Subscriber’s need.
7. How funds are invested under NPS?
Subscriber gets the choice of 3 funds under NPS –
Equity, Corporate Bonds and Government Securities. These are also known as E, C
and G respectively.
Subscriber can decide on his own about these choices restricting
the exposure to Equity to 50% of contribution amount. It is called Active
Choice Investment option. Subscriber also gets an option of Life Cycle Fund which
is
also known as Auto Choice. Under this mode, investment across three funds is
done as per the age of the employee.
Subscriber can have different Investment Choice (Auto
/ Active) for Tier I and Tier II account.
Subscriber can change the Asset Mix and Investment
Choice once in a financial year for both Tier I and Tier II account.
8. How to exit from NPS?
Subscriber can exit from the Scheme after 10 years of
account opening or on attainment of the age 60 years whichever is early. The
payout will be defined as per the exit age of the Subscriber.
Exit before the age 60 years:
Up to 20% of Corpus can be withdrawn in lump sum
Balance amount needs to be invested in Annuity (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)
Exit at the age 60 years:
Up to 60% of Corpus can be withdrawn in lump sum
Balance amount needs to be invested in Annuity (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)
Subscriber exiting from NPS at the age of 60 gets
following flexibility:
1. Subscriber can defer the decision to invest in
Annuity for 3 years.
2. Subscriber can defer the decision of lump sum
withdrawal for 10 years.
3. Lump sum amount due for withdrawal at the age 60
can be withdrawn in 10 instalments as per the choice of the Subscriber.
4. If Subscriber does not want to exit at the age of
60 years, he can keep on contributing towards NPS till the age 70 years.
In case of death of the Subscriber the entire Corpus
is given to the nominee. In case Subscriber has not opted for any nominee, the
legal heir can claim the amount.
9. What is the procedure for partial
withdrawal?
In the entire life span, 3 partial withdrawals are
allowed from Tier I account before attainment of at 60 years.
First partial withdrawal allowed after 3 years of NPS
account opening
2nd & 3rd partial withdrawal can be opted at any time
after the 1st partial withdrawal is done
25% of the Contribution amount will be allowed for
specific purposes like Child marriage, Higher education, Treatment of Critical
illnesses, buying home etc.
10. What are the details about investment in annuity?
On exit from NPS or retirement some portion of Corpus
has to be invested into Annuity scheme to provide monthly pension. Entities
registered with PFRDA to provide annuity service are:
1. Life Insurance Corporation of India
2. SBI Life Insurance
3. ICICI Prudential Life Insurance
4. Bajaj Allianz Life Insurance
5. Star Union Dai-ichi Life Insurance
6. Reliance Life Insurance
7. HDFC Standard Life Insurance
11. What are the Tax Benefits and Tax
Treatments?
Tier I
Tax Benefit:
Salaried Individual
Investment up to 10% of Salary (Basic + Dearness
Allowance) is deductible from taxable income u/s 80CCD (1) of Income Tax Act,
1961 subject to 1.5 lakhs limit of section 80C
Additionally, investment up to Rs.50,000 is deductible
from taxable income u/s 80CCD (1B) of Income Tax Act, 1961
Self Employed Professionals
Investment up to 20% of Gross Annual Income is
deductible from taxable income u/s 80CCD (1) of Income Tax Act, 1961 subject to
1.5 lakhs limit of section 80C
Additionally, investment up to Rs.50,000 is deductible
from taxable income u/s 80CCD (1B) of Income Tax Act, 1961
Tax Treatment
Up to 40% of Corpus withdrawn in lump sum is exempt
from tax
Balance amount invested in Annuity is also fully
exempt from tax
Pension received out of investment in Annuity is
treated as income and will be taxed appropriately
Tier II
There is no tax benefit on investment towards Tier II
NPS Account. Indexation benefit can be claimed on maturity.
12. What is the process to participate
in NPS?
For New Registration:
To open a new NPS, Subscriber needs to have either PAN
Card or Aadhaar and a Bank Account.
Also while making registration, Photograph and Signature need to
be uploaded within 4 – 12 KB.
After filling up all the required information payment
can be made from selected Bank Account.
On Successful registration a PRAN (Permanent
Retirement Account Number) is generated along with a letter. Such Letter need
to be signed and send to CRA (Central Recordkeeping Agency) in 90 Days.
After that Subscriber will then receive PRAN Kit which
will contain Card, TPIN, Master Report and Welcome Letter.
For Contribution:
Minimum Contribution = Rs. 500
Maximum Contribution = Any Amount
Maximum 50% of such contribution can be allocated to
Equity. Rest of the fund will be parked
in Debt.
Conclusion:
NPS is a good scheme to participate in as it guarantees
pension after retirement. But there are some caveats when I say it is a good
scheme. It is a good scheme because the money gets locked in (if you don’t opt for
partial withdrawal or early closure) till retirement and hence you would able
to get the benefit of compounding. But, the catch is, only 50% can be allocated
to equity asset class and rest all will be allocated to debt instruments.
If you are say 30 years old and instead of NPS, you start
investing the same amount monthly in equity mutual fund till your retirement
(without withdrawing in between), chances are high that you would get very high
returns from mutual fund as compared to NPS. But, the problem is many investors
do not think long term or are not very patient and if the share market tanks, they
will sell the investments. In such scenarios, NPS is better alternative because
you would stay invested for long term and can get good returns.
No comments:
Post a Comment